EP 211: Guide to Handling Debt in Divorce

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In this episode, I want to focus on discussing the ins and outs of debt. It’s a very controversial, and frustrating, and challenging issue that can pop up during divorce. I haven’t covered it in a while, so I want to make sure that you understand the essential items when it comes to how to deal with and split debt in divorce and provide some tips so that you can make the right decisions and do what’s best for your specific situation. 

When I think of a debt, the most common of course is credit card debt. Other things can be personal loans. Medical bills are common. Auto loans fall into that category. Student loans, mortgages, I’m going to exclude student loans and mortgages for the moment because they have some different intricacies than debt overall. But even if you’re thinking about student loans and mortgages, many of the core principles that I’m going to talk about here apply to this episode. It really applies to any kind of debt that you may have, so you should really understand your options and what kind of the best things to do may be when splitting debt. 

The things I want to cover in the debt episode today is five, or four or five important points. I think four points we’re going to focus on. I’m going to go through them in depth. The first is establish what separate versus marital property. Second is minimize and pay down joint debt. Third is split debt simply. And the fourth is going to be if one spouse is responsible for a joint debt, make sure that those payments actually get made. We’re going to go through these particular items. Things you should be thinking about when it comes to your situation is debt is one of the most common things we deal with. And almost every person I get to work with, there’s some sort of debt I’d say 95% of the time, and we have to figure out what we want to do with it and what the smartest options are given the situation. 

So let’s start with point number one, which is establish what’s separate versus marital property. This is where one of three dates can be very important in the context of your divorce. The first is the day you file for divorce. The second is what might be considered the separation date. The third might be something that is a date that’s relevant in your state for a particular reason. 

Why are these dates important? Well, you want to understand, and you need to have a clear understanding, is what actually is joint debt, or marital debt I should say, and what is actually separate debt that the person who incurred it, who took on that debt needs to pay for. The reason it’s so important is that many times … Almost every day I talk to someone, like you, who says, “Hey, my spouse went up and got this big credit card bill. I didn’t even know we had the card. I don’t know what the money was for, et cetera. Am I responsible for it?” Or you’ll say your spouse is terrible with money and did this and that, and now all of a sudden we have this debt, or he has this debt, or she has this debt. Am I responsible for half of that amount? 

Well, the answer is really hard and depends upon your state. But if you have a clear date of separation or a clear date of divorce, or I should say date the divorce started, that could be an indication of what debt is yours and what is not. There’s also a discussion, as every state has different rules and different ways that they treat debt, but sometimes there are other dates that are of relevance. Also, I discussed before in a previous episode, if you haven’t heard it, about dissipation of marital property, in which case sometimes if someone wastes money that’s not related to furthering the marriage then that can be also considered separate and belonging just to that person rather than joint debt. 

But regardless of the situation, it can be … Or I should say marital debt. Regardless of the situation, you need to really be clear and work closely with your attorney and your financial advisors to figure out, all right, what does the law say? What is actually my debt that I will be responsible for splitting? And what is the debt that solely belongs to my spouse? 

Now, there’s a difference between divorce rules and other areas of the law. If your name is on the debt … And we’re going to get into this a little bit more in this episode. If your name is on the debt, then you are legally responsible for it, even if that debt may be considered separate property. If you just stop paying that debt and you’re responsible for the debt, the person who … If you went to Visa and had a credit card that had both your names on it but your spouse ran up the bill on that Visa card, you might say, “Well, it’s separate property for divorce purposes.” But if that spouse doesn’t pay down that credit card, then they can still go after you and your credit for the remaining bill. The important thing to do, and one of the most important things in divorce, is just figuring out what you have to split and figuring out what is actually something that you’re splitting versus something that gets moved on to the separate property side of the pile, and that applies equally to debt. 

The second thing is minimize and pay down any joint debt. I talk to a lot of people who have IRS debt. I talk to a lot of people have joint credit card debt. One of the pieces of advice I say is if you look at your full financial picture, one of the questions is, can you pay down this joint debt with other assets so that when this divorce is over you’re not still tied to your ex-spouse in any way financially or have any liability connected to them because you still have a joint debt outstanding? And now, of course, it varies by person. But to the extent that you can talk to and talk through the joint debt issues and your financial picture will allow you to pay it down, then you should pay down that joint debt as part of the divorce process and just be done with it. Makes things much smoother or can make things much smoother down the line when you are … after the divorce is over. 

The third tip is to split debt simply. What is most important about that is that the person whose name is on the debt, to the extent possible, in general, should be responsible for paying off that debt. Now, let me be clear, is just because they’re responsible for that debt doesn’t mean that it’s separate property. It still could be a marital debt that just happens to have only one person’s name on it. But if you have a credit card, and … I’m just going to make up a very simple number. But if you have $1,000 on a credit card that you racked up while buying groceries over a few months, that could very well be a joint debt. But as you think about splitting things in divorce, you should take that debt and be responsible for paying it on your own after divorce is over because it’s much easier than trying to transfer it to another spouse and going, to your ex spouse I should say, and going through that process. 

Conversely, though, you have to remember that one thing that a lot of times you forget or you may forget during the divorce process that everything is a trade-off. Negotiating a settlement or coming up with an agreement in the divorce process is just about what trade-offs are you going to make. So if you take the example of the thousand dollar marital credit card debt, you might take it as part of the divorce settlement. But still, 500 of that thousand belongs to your spouse. So what happens is you would get an extra $500 worth of another asset. It’s not like you’re taking the debt and you’re losing out, it’s that you have an extra 500 of a negative balance on your ledger so you’re going to have to get $500 extra of assets somewhere else to make up for it. So, it’s not a one-way street. 

And conversely, if your spouse has a debt, let’s say they have a $5,000 debt, that turns out as marital property, well, it might just be much cleaner and simpler for that spouse to take that $5,000 debt. But conversely, to make up for it, maybe they get an extra $2,500 out of a bank account or something or proceeds from something so that they get their share of the debt. But at least you’re not the one who’s responsible for paying it. So there’s both sides to the issue. The most important point is that it’s just a trade-off. Financially, it’s just numbers on a piece of paper. We want to get those numbers as fair as possible as we can, and it’s easy to account for many times just by what assets you give up or what you keep. 

And then finally, the last point is that if one spouse is responsible for a joint debt, they need to make sure that they make … You need to make sure that that person actually makes the payments. I’m going to give an example that I’ve dealt with many times in the past, which is oftentimes as part of the divorce process you have some debt and you’re going to sell the home. And as part of selling the home, you need to pay off some debts with the home proceeds from the equity, and it’s actually your spouse’s job to pay off some of those joint debts. Well, if you sell the home and give the spouse the money to pay off the joint debts, what happens if they decide to spend that money on something else and don’t pay down that debt they agreed to? Well, the money’s gone.

Or what happens if they just hoard the money? Or what happens if they only pay down part of the debt? Or what if they tell you they paid down the debt but didn’t actually do it? So maybe months down the line or years down the line you find out that that debt is still outstanding and you’re getting calls from credit creditors and your credit, your personal credit, goes down the drain because your spouse didn’t do what he or she was supposed to do with the proceeds that you gave them. 

Or if you’re not even giving the proceeds, sometimes you could just say, “Hey, there’s this credit card from MasterCard that has $10,000 outstanding. It’s the sole responsibility of your ex-spouse to pay that card down,” and to not hold you liable. Well, it’s all well and fine that you came up with that agreement, but MasterCard didn’t agree to your divorce settlement. So if your spouse doesn’t pay that debt, then they will be coming after you for the remaining balance. The point is is this is why I also said in point number two is to minimize and pay down any joint debt. When you do have some debt that’s outstanding, you really need to make sure that your spouse or ex-spouse is on top of paying that … or that debt down because it can come back to haunt you later. 

So here are the four things to focus on when it comes to debt. The first is establish what’s separate or marital property. The second is minimize and pay down any joint debt. Third is split debt simply. The person with the name on it, generally speaking, should be the person who keeps it, and takes it after divorce, and takes that responsibility. And forth is if one spouse is responsible for a joint debt then makes sure that they make the payments.

Here’s the big overarching thing that I always keep in mind when talking about debt, and that is you want to minimize your liability. You don’t want to be liable or have liability connected to your ex-spouse when the divorce is over, particularly when it comes to debt. Look, you might always have kids or something like that together, so you’re always connected to them. But when it comes to certain financial things, if you can avoid having joint accounts with both of your names on it, it prevents anything bad from happening later down the line with those joint accounts if one spouse racks up a bill, or if one spouse fails to pay a bill, or if one spouse steal some funds from something. Whatever the case may be, it’s oftentimes much, much more expensive to try and go back through the legal process than just dealing with these things with a little bit of foresight and thinking about them in advance. 

I really want you to listen to this episode, understand the key points, and think about the debt that you may have as part of your divorce. Make sure that you’re handling it and splitting it the right way because it’s a very important topic that we have to deal with and deal with carefully to make sure that you end up in a good position when this process is complete.

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