What You Need To Know About Divorce And Allocation of Debts

In addition to dividing property, most couples also have debts to divide. Sometimes the debts will exceed the assets. The court, or the parties by agreement, will divide whatever property the couple has and then allocate teach party’s responsibility to pay off particular debts. (The wife pays off MasterCard; husband pays off Visa, and so on.) 

If the debts were jointly incurred, both parties remain ultimately responsible for them. If the spouse who was supposed to pay a particular bill does not, the creditor can still look to the other spouse to collect the amount due. For example, if during the marriage the husband and wife applied together for a MasterCard, both signing the application and both promising to make payments, both are liable to MasterCard, even if only one spouse made the charges. 

If a court or a settlement agreement requires a wife to pay the MasterCard bill, but she does not, and MasterCard collects from the husband, the husband can sue the wife for the loss, or he may be able to deduct his loss from future payments he may owe his wife (such as alimony if there is any). 

Given the potential for continued joint debts, it is important to limit one’s liability for the other spouse’s debts even after a divorce. Thus, it is best to close joint credit card accounts or other joint accounts as soon as a divorce is pending (unless the party has a great deal of faith in one’s soon-to-be ex-spouse). If it is not possible to close an account because there is an outstanding debt that cannot be paid off immediately, it is prudent for a spouse to notify the creditor that they will not be responsible for any additional debts beyond current outstanding balances. 

For example, if there is an outstanding home equity loan of $10,000 but an available line of credit of $40,000, it probably is best to notify the creditor (orally and in writing) that the line of credit should not be extended beyond $10,000. Similarly, if one spouse co-signed on a business loan for the benefit of the other spouse’s business, it would be prudent for the spouse who does not own the business to notify the creditor that he or she will not be responsible for any business debts beyond those already incurred. 

One spouse normally will not be responsible for than-other spouse’s debts were incurred only in the name of the spouse who made the purchase. In many states, however, an exception will be made for debts that are considered family expenses. Examples of family expenses include groceries for the family, the children’s necessary medical expenses, and children’s clothes. If a debt is considered a family expense, both spouses are probably liable for the debt, even if only one of them incurred the debt. Community property states also generally make spouses liable for each other’s debts incurred during the marriage. 

Educational loans are a common debt. Generally, a court will direct each party to repay his or her own loans for educational expenses. If, however, the debts were incurred during the marriage, the court can direct one spouse to repay the other spouse’s educational debts. 

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