What happens to debt during a divorce?

Divorcing spouses in California should understand how their shared debt may impact their divorce agreement and their individual financial health after the divorce is completed.

Whether simply contemplating a divorce or actively engaged in the divorce process, a person may start to feel anxious about how the end of a marriage may impact his or her financial future. A divorce generally reduces the per-household income and may result in the loss of some assets as part of the property division settlement.

In addition, divorcing spouses may need to assign individual responsibility for joint debts, further impacting the financial status of each person after the divorce.

The creditor view on joint debts in a divorce

When a married couple jointly takes out a loan or opens a credit card, for example, the lender or creditor views both parties as responsible to repay the debt so long as both spouses’ names remain on the account.

As explained by Bankrate, when a couple divorces and the divorce decree assigns responsibility for a debt to one person but the original account continues to reflect both parties’ names, the creditor may still consider both spouses responsible for the debt.

When the person identified as liable for the debt in the divorce settlement fails to repay the debt, the creditor may attempt to collect on the debt by pursuing the other party. Negative reports to credit bureaus may result for both spouses as well.

Removing one person’s liability for a debt

Some people protect themselves by requiring the person responsible for a previously joint debt to transfer that debt to a new, solo account.

Mortgages follow a similar path

The Mortgage Reports indicate that home loan lenders take the same approach to debt liability as do credit card banks and other creditors. This may well contribute to the decision made by many couples to sell their family home during a divorce.

When one spouse chooses to keep the house after the divorce, a new or refinanced mortgage in that person’s name only may be the best way for the other spouse to avoid financial responsibility for the property, even if a quit claim deed gives full ownership to one person.

Student loans and divorce

Generally speaking, the person who takes out a student loan must repay the debt. However, according to U.S. News and World Report, if the student loan money paid for joint living expenses while one person was in school, the debt may be considered joint and subject to sharing in an ensuing divorce.

Legal advice is important when dividing debt in a divorce

Couples getting divorced in California, a community property state, should always consult with an experienced family law attorney to fully understand the implications of the debt division choices they make.