Divorce and Debt Responsibility: What Happens to Your Debt When You Separate?
If you’re getting divorced, one of your concerns will most likely be how the divorce will impact your personal finances. Although each case is unique‑and this article should not take the place of consulting an attorney—this post will share helpful information and important questions to ask as you navigate the divorce process.
One commonly asked question is: “Am I responsible for my spouse’s debt after separation?” The answer to this question will vary, depending upon your personal circumstances and the state you live in. States generally follow either community property rules or common law property rules.
Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. If you live in Alaska, you and your spouse may have signed an agreement making your assets community property, but if you didn’t sign this agreement, Alaska follows common law property rules—as does every other state excluding the nine states that adhere to community property law.
The rest of this post will share more information on the distinctions, as well as some answers to other questions about divorce and debt responsibility. We’ll share strategies for consolidating your debt through personal loans, refinancing your student loans in your new name (if applicable), and much more.
Community Property vs Common Law Property Rules
If you live in a state where community property laws apply, both spouses are typically responsible for debts incurred while married. In fact, most debts are considered to be the responsibility of the “community” (the two married partners) even if only one of them signed the paperwork.
After a legal separation takes place, debt in these states is typically owed only by the person who took on that debt. Exceptions are made if the debt was taken on, pre-divorce, to maintain a joint asset, such as a new HVAC system on a home; if what was purchased was needed for family necessities; or if the couple keeps joint accounts.
But what if one or both members of a married couple took out student loans before the marriage? In this case, the debt very well might not be considered part of community debt, although it could if the spouse signed on as a joint account holder.
If your state follows common law for property , debts taken on by one spouse are, typically, solely that person’s debts. Exceptions can include ones that benefit the marriage, such as childcare, food or clothing, and shelter or household items considered necessary.
Both parties are typically responsible if they both signed a contract agreeing to make payments, or if both names are on a property title to property or a shared account. This can also be true if both spouses’ income was considered when a creditor was making a lending decision.
End of Debt Accrual
A crucial question to have clarified is when, exactly, during the separation/divorce process will you stop incurring marital debt in your state? In California, as one example, a person stops being responsible for his or her spouse’s debt on the date they separate. Every state is different so it is best to consult with an attorney.
Note that, even though state law may draw the line on your liability for a spouse’s debts because of separation or divorce considerations, creditors may still have a legitimate case for pursuing payment from you if repayment of the debt falls behind.
Plus, let’s say that according to the divorce decree, your soon-to-be ex-spouse will be responsible for payments made on a credit card. If your name is on that credit card, the court would order your ex-spouse to make payments—but, if he or she doesn’t actually make the payments on time, it can still affect your credit in a negative way.
Talk to your attorney about options available to get your name off of any accounts with debts assigned to your ex-spouse, including having your ex-spouse refinance the loan so that it is solely in his or her name. You and your ex-spouse could agree to each ask creditors to remove one another’s names according to the dictates of the divorce decree, but creditors are not required to comply.
In response to your request, a lender could, for example, ask you to apply individually for credit to see if you can manage the debt based on your income and credit history only; if satisfied with your ability to repay the debt, the lender might agree to remove your ex-spouse’s name. If one spouse has higher income and/or better credit history than the other, requests might be approved for one and not the other, making the situation more inequitable.
Courts may assign debts that are considered necessities to the party believed to have the ability to pay them. This may or may not be divided equally, especially in common law property states where the goal is equitable division, rather than equal division of property.
No matter which one of these legal structures your state follows, debt typically follows the asset. In other words, if you get a car, you’ll probably also be responsible for paying it off. This also means that, if you end up with more property than your ex-spouse after the divorce, you may be taking on a greater percentage of the debt.
If you and your spouse signed a prenuptial or postnuptial agreement that lays out division of debt in case of divorce, your situation probably won’t mirror the typical divorce in your state.
Because laws about divorce and debt responsibility differ by location, it’s important that the attorney you consult is experienced in the laws of your state. Some couples find that using a mediator to amicably divide debts and assets is preferable to having a judge make the calls. Some mediators are also attorneys, which can be helpful.
Managing Debt After a Divorce
Once the dust clears after a divorce, you’ll need to take stock of what you owe, balance-wise, and what monthly payments you are responsible for. You may discover that payments are higher than what you can comfortably afford each month, now that you’re only relying upon just one income.
In that case, are there any loans that you can pay off and still have enough of a savings cushion in the bank? You might, for example, have a loan with a relatively high monthly payment but, if you only have a few payments left, paying off the loan may help.
If not, consider consolidating your high-interest credit cards and loans into one payment through a lower-interest personal loan. That way, you can focus on paying down just one loan, one that can come with more favorable repayment terms. Consolidating debt with a personal loan could significantly free up cash flow, right when you need it after a divorce.
If you are currently paying off student loans, you may consider refinancing your student loans as a way to free up cash flow post-divorce. At SoFi, you can refinance student loans in a different name; important if, as one example, you take back your maiden name after your divorce.
This article is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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