What is debt and how is it classified for divorce purposes?
Like property, debt is classified as marital or separate. In general, both spouses are responsible for any debts incurred during the marriage. It doesn’t matter which party actually spent the money. When the property is divided at the time of divorce, it’s often the case that the person who gets the asset also gets the responsibility for paying any indebtedness secured by that asset. Even if your spouse agrees to take over the debt, joint obligors on a loan will remain jointly responsible. That is, the creditors can seek payment from either of you.
There are basically four types of debt:
- Secured debt
- Unsecured debt
- Tax debt
- Divorce expense debt
Secured debt gives the lienholder or lender a right to repossess the property in the event of your default on the loan. Some examples of secured debt include mortgages on your real estate, car loans, and boat loans. If a loan stands in the joint names of you and your spouse, you’ll need to make it very clear in your separation agreement who will be responsible for making payments on the loan. Otherwise, if one spouse fails to make timely payments, the creditor can pursue the other spouse or (eventually) seek repossession.
Unsecured debt does not give the lender the right to repossess any specific property, although there are other remedies at law. Typical examples of unsecured debt include credit cards, personal bank loans or lines of credit, and loans from family and friends.
If you sign a joint return with your spouse, you’re each liable for the tax debt. For three years after the due date for filing your return, the IRS can perform a random audit of your joint tax return (although the period may be longer than three years in cases of fraud or failure to file). To avoid potential tax problems in the future, your divorce agreement should spell out what happens if any additional interest, penalties, or taxes are imposed for any prior tax year. Notwithstanding any such agreement, you should be aware of the so-called innocent spouse rules, which provide certain protections to a taxpayer whose spouse understated the tax due on a joint return. A number of rules and conditions apply.
Divorce expense debt
Divorce can be expensive, and sometimes a spouse will seek a court order to make the other party subsidize attorney’s fees for both sides. This might happen, for instance, when only one spouse works. Since the homemaker-spouse may have no income to pay for a divorce attorney, a judge might order the working spouse to pay.
Sometimes both parties work or have sufficient funds with which to retain attorneys. In these cases, you’ll need to spell out who pays for what. For instance, if both parties want the family business, the family home, or a pension to be appraised, you’ll have to apportion the costs. The same holds true if you both decide to transfer title to an asset after a divorce.
Debts can also be incurred during the separation period. If luxuries are purchased during this period, courts are likely to assign the debt solely to the party who ran up the debt. In general, debts incurred after the separation date and before the divorce is final are the responsibility of the spouse who incurred them. One exception is family necessities (i.e., food, clothing, shelter, and medical care). These necessities can be paid by the other spouse if the incurring-spouse can’t afford to pay.
What are the rules regarding joint credit card debt?
Either signer on a joint credit card can be held responsible for 100 percent of the debt, not just one-half of the debt.
Hal and Jane are seeking a divorce. During their marriage, Hal handled the finances and Jane stayed home with the children. During the discovery period of their divorce, Jane learned that Hal ran up over $30,000 on their joint credit cards to pay for his expensive suits, dinners for friends, recreational pursuits, and the like. Since they live in a community property state, all assets and debts will be divided down the middle. Thus, Jane will be responsible for paying $15,000 of the debt (from a judge’s perspective). However, if Hal fails to keep up with his monthly payments (or, if he decides not to pay any of his $15,000), the credit card companies can go after Jane for the full $30,000 because the divorce settlement is not binding on creditors.
During divorce proceedings, several issues can arise regarding credit cards, such as removing a spouse as an authorized signer, and understanding the obligations of joint credit card owners versus single card owners with two authorized signers.
Will my former spouse’s bankruptcy affect me?
Maybe. It will depend on the type of bankruptcy your former spouse chooses to file under (Chapter 7 or 13) and the type of debt owed. Debts such as alimony and/or child support payments (e.g., domestic support obligations) that are incurred as a result of a divorce decree/separation agreement, are protected from bankruptcy discharge (although a debtor’s bankruptcy can be the basis for the future reduction of these types of debts). On the other hand, debts owed as a result of a property settlement may be dischargeable under Chapter 13 bankruptcy.
It is important to note that the ways in which bankruptcy and divorce affect one another are complex. As a result, you may want to consult a bankruptcy or divorce attorney for more information.