Dividing Debt

In addition to dividing property, most couples also have debts to divide.  Marital debts are debts that were acquired by the parties after the date of marriage and before the date of final separation.  Marital debts include such items as mortgages, loans, credit card balances, tax obligations and judgments.  A debt may be a marital debt even if only one

of the parties contracted for the debt as long as the debt was incurred during the marriage. 

Before a client agrees to the assignment of any debt, be sure to consider what, if anything, is security for the obligation.  If an asset such as a car is security, the spouse who gets the car should also be responsible for paying the debt associated with the car.  If a debt, such as a signature loan or credit card charge, is not secured by property, be sure that the debt is assigned to whoever is more financially reliable or capable of paying the debt.  If the client does not want responsibility for the debt and does not believe that his or her ex-spouse will pay it for one reason or another, the client should plan to pay the debt in full prior to the divorce.  If neither the client nor his or her spouse has sufficient resources or income to pay off the debt, the two parties can sell an asset and use the money from the sale to pay the debt.  Once the debt has been paid in full, it is important that the client save the receipts as proof that the creditor is no longer owed any money.

There are essentially three methods to handle joint debts in a divorce: (1) the debt can be assigned to a responsible spouse for payment with the agreement that the responsible spouse will indemnify and hold harmless the released spouse; (2) the debt can be re-financed into the name of the spouse who will be responsible for the debt; or (3) one of the parties can repay the debt in full prior to the divorce.

The effectiveness of an assignment situation can be increased if a creditor will release the spouse not responsible for payment from the debt.   This is called an "assumption" because the spouse who remains responsible for the debt is said to have "assumed" the obligation of the released spouse.