How To Handle Marital Debt When You Divorce

Posted on: 24 February 2015

The finances involved in a divorce don't just involve splitting assets. Divorce settlements include dividing repayment of your outstanding debts as well. But just because the court says who should pay what doesn't mean it will happen. You need to take steps to protect your credit, especially if you are a joint credit card holder or co-borrower on a loan. It won't matter how the court divides the payment of marital debts between you, creditors will continue to hold both of you responsible.

Refinancing Debt in One Spouse's Name

If your spouse wants to keep a vehicle, boat, cabin, or home financed in both your names, refinancing the loan will remove your name from the loan documents. You can further protect yourself by having your attorney state explicitly in the divorce papers that your former spouse must refinance the property within a specific time frame. The wording of your divorce settlement should also indicate what will happen -- like putting the property up for sale -- if your ex doesn't follow through with the refinance process.

Including an Indemnity Clause

A divorce settlement that says you and your spouse must each pay half of your marital debts doesn't guarantee that you won't end up paying more. As a way to protect your credit rating after the divorce, instruct your lawyer to add an indemnity clause to the divorce agreement before you and your spouse sign off on the final paperwork.

An indemnity clause is a good thing to have if either spouse defaults on a loan or fails to repay credit card debt for which each is responsible. For example, if you make the payments for a debt, the divorce agreement hasn't assigned to you to keep creditors from making negative entries on your credit report, you can then take your ex to court to get compensated for the money you pay.

Knowing What Debts Are in Your Spouse's Name Alone

The division of assets and debts works differently if you live in a community property state. In that case, you may be responsible for repaying debts of which you weren't even aware. If you reside in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, you live in a community property state.

Like assets acquired during your marriage, debts incurred during the marriage are considered joint debts even if you didn't sign for a loan or credit card account. What does that mean for you? It means a creditor has the legal right to come after you for payment if your ex fails to repay the debt. The only way you won't be responsible for separate debts your spouse incurred during the marriage is if the two of you sign an agreement to have your incomes and debts calculated separately in divorce.

Whether or not you live in a community property state, it makes sense to stay on top of family finances when you're married. If one day you find yourself in divorce court, being aware of what debts you owe jointly and separately will help you negotiate a fair divorce settlement for both. Talk to experts like Law office of Kristine A. Michael, P.C. for more information.