While it is important to divide up the assets in a divorce, it is just as important to divide the debts. Marital debt is one that was incurred during the marriage. It does not matter in whose name it was incurred. If the debt was created during the marriage it is marital and must be addressed during the divorce process. This does not mean that every debt will be split equally and it does not mean that every debt will be counted when balancing the assets and debts to arrive at a fair division. It does mean, though, that all debts come into play and must be determined. So, how does this affect your divorce? Here’s what you should know.
- Determine first, all debts that are marital, potentially marital, or pre-marital. If a debt existed before the date of marriage, that does not usually get considered when dividing the debts. A pre-marital credit card debt of $10,000 will likely mean that if that same credit card has $20,000 on it at the time of divorce, half of that credit card debt will not be considered marital and won’t be divided between the Parties. If there is a pre-marital loan that was brought into the marriage, whatever is remaining to be paid on that loan will be solely the responsibility of the Party that brought it into the marriage. Sometimes, too, any payments made on the pre-marital loan during the marriage can be credited (reimbursed) to the other Party to some degree because “marital funds” were used to pay the loan during the marriage. Student loans incurred before the marriage remain solely the responsibility of the Party that has that loan and when balancing assets and debts, it will be ignored. However, if the student loan was taken out during the marriage, it is a marital debt and will figure in the balancing of assets and debts.
If a debt is incurred during the time Parties are separated but the divorce is not final, those are still marital debts. Sometimes, Courts will segregate debts incurred during the separation period but usually does this only when the debts are significant and both Parties have “post-separation” debt. Even then only when the matter is made a pivotal issue will the Court turn its attention to post-separation debt. In most circumstances, any debt incurred during the marriage—even during the separation of the Parties—is “marital” debt and will be considered for division.
2. How each debt is divided depends upon which of the Parties can pay the debt and what makes sense. If a Party has no income (such as a stay-at-home Parent of a Child under 2 years old or a full-time student in a qualifying program of study, etc.) it does not make sense to assign the payment of debts to this person since they have no ability to pay the debt.
However, the Court can shift the burden by replacing spousal maintenance or balancing the assets against the debt so that the payor of the debt pays less spousal maintenance or gets more assets to offset the debt. Rather than paying $1000/mos. in spousal maintenance, a Court may award only $500/mos. and the other $500/mos. goes toward the payment of marital debts. Your Colorado Springs family law attorney will help you decide the different options and choose what works best for you—or what the Court is most likely to order.
Sometimes it does not make sense to divide up a debt so that each Party is paying a portion of the debt. For example, with a student loan, it is much easier for the student to pay and monitor and administer the loan repayment than for an ex-spouse—especially because student loans often are repaid over many years. The Court would likely award the entire student loan repayment obligation to one Party—not both—but would balance out the debt by equalizing it with the other Party getting just as much debt or by awarding the payor more assets.
3. Credit card debt that is accumulated during the marriage is marital—regardless if the credit card is in one Party’s name or is a joint credit card. If the credit card is in one person’s name, that person will likely be awarded that debt to pay. It is easier and makes sense since that one person has access to the card and the debt holder. The Court would balance that debt going to one person by either awarding debt to the other person or by allocating more assets to the payor of the debt.
With joint credit cards, it gets trickier. It may seem as if the debt would be easy to divide with each Party paying ½ the monthly amount due—but think about it. If each Party is paying ½ of what is owed each month, that could mean many, many, many years of staying connected to a credit card (and an ex-spouse) on a monthly basis until the debt is paid off. And, how would you prevent the other Party from running up the balance and buying more things on the card? Also, if you pay ½ owed each month but your ex-spouse does not pay their portion, your credit score is impacted and there will be late fees and penalties.
The credit card company does not care that someone else was supposed to pay a portion of what is owed. The company will come after both Parties and both will have their credit scores impacted and the balance on the card will increase with fees. Also, you cannot close a joint card permanently until it is paid off and it is unlikely that one Party can be “removed” from a joint credit card. A better solution for joint credit cards is to pay them off with assets awarded (with proof of the payoff and closure of the card) or each Party transfers part of the balance to a new card solely in their name and closes the joint card when it has a zero balance.
Be certain to find a solution so the card is paid and permanently closed—and you no longer have that open card appearing on your credit report. Otherwise, you are at the mercy of someone who can harm your credit at a time you need all your financial resources available. Attorneys often have to get creative and find unusual strategies to extinguish joint debts. It is worth the attorney’s extra time and effort, though, to have a Client emerge from a divorce with a minimum of financial risk and damage to future credit.
Marital home debt is usually divided through the determination of what happens with the home. If the home is sold, the debt is paid off in the sale. As homes often have a value above the amount owed (“equity”), if the home is sold and the debt is paid, there are often additional funds left over for the Parties to divide. This is usually some nice tax free cash and can provide both Parties with sufficient funds to get started on their future.
If a Party wishes to retain the home and the loan is in their name alone, the only issue that must be decided is how much that person must pay the other to buy out the other’s marital equity. If there are enough other assets to provide the other Party with sufficient marital equity, nothing more needs to be done with the home—other than one Party moves out.
If the home needs to be refinanced by the one Party to pull out sufficient funds to pay off the other’s equity interest, that often raises the monthly payment on the home. This must be a consideration on whether a Party can keep the home or not—once it is refinanced to pay off the other Party, is the monthly payment still affordable? If the marital home loan is in both Parties’ names, they must either sell the home, pay off the loan (with assets awarded to the Party that wants to keep the home) or one Party refinances the home in their sole name—and then keeps the home.
A Court will not order both Parties to remain obligated on the joint home loan. Parties can agree to do this (it is ill-advised), but absent agreement, a Court will not order it. Either the home is sold thereby extinguishing the loan or it or it is refinanced into just one Party’s name.
5. Car loans create particular dilemmas. If the vehicle was purchased during the marriage it is a marital vehicle, and the debt goes with the vehicle. Sometimes the asset is worth more than the debt, sometimes not. If the debt is in only one Party’s name, the vehicle will likely be awarded to that person. If the vehicle debt is in both Party’s names, that is where the complications arise. Each Party usually needs a vehicle (to get to work, transport the Children, live in modern society, etc.); but when a vehicle loan is jointly held (in both names) both Parties remain obligated until the loan is either paid off, the car is sold/traded or the loan is refinanced.
Both Parties remain obligated on the loan even though only one Party is Court ordered to pay the loan. The Court cannot change the loan contract and this means that if payment is not made by the person ordered to pay, both Parties’ credit scores are impacted and the car may be repossessed.
One option for a jointly held car loan is refinanced. However, refinancing a joint car loan into only one Party’s name, can be difficult. If the vehicle is upside down (more is owed than it is worth, it likely cannot be refinanced or sold. Also, an upside-down vehicle cannot be traded in or the monthly car payment on the new vehicle will be huge--to make up for what is owed on the traded-in car plus the payment on the new car. Unfortunately, there is no easy solution if refinance or sale is not possible.
What happens most of the time is that one Party (the one that drives the car) will be ordered to pay the jointly held car debt and will likely be ordered to indemnify the other Party if they default on a payment. However, this is an empty remedy since someone who does not make a Court ordered car payment, usually cannot or will not have funds available to indemnify (pay back) the other person and when the payment is missed, the harm to credit scores is automatic and cannot be undone.
Even having an order that if a payment is missed the other Party can go get the car, often results in failure. The deadbeat payor will hide the car or cause damage to the car if they think it is going to be taken by the other Party. If payment is not made and the other Party cares about their credit score, the other Party could always make the payment (to preserve their credit) and try to get paid back by the deadbeat payor. Good luck with that.
A better option sometimes might be to pay off the car loan with other assets, if possible. House sale money, savings accounts, etc. might provide the means to get the joint debt settled. Whoever gets the car and the benefit of the paid off debt, will have to give something up to balance what they receive. Your attorney can help you understand better the facts surrounding the vehicle loans in your divorce. It is worth your attorney’s time and cost to attempt to create the best possible and most realistic resolution to car loan dilemma. It can save you a few years of aggravation and ruined credit allowing you to proceed into a successful financial future.
