Debts Get Divided Too
In divorce, the courts divide both community property and debt. Debts will be divided in a “just and right” manner—the same standard used to divide community property.
More on the Standard Used For Division of Debt
A just and right division of debts does not require a court to order a “50-50 split.” For discussion of the factors a court can consider in making a just and right division, please review “The Rest of the News” within this website’s section on “Dividing Community Property” by clicking here.
Premarital Debt Cannot Be Divided
A court has no authority to order one spouse to pay the other spouse’s premarital debts. This is an important provision to note—particularly since it’s common for one or both spouses to enter marriage with, for example, substantial amounts of student loan debt.
Creditors’ Rights Are Not Affected
The division of debts between the spouses in a divorce decree has no effect on the rights of creditors. The decree only alters the rights and obligations between the ex-spouses. An example may help clarify this point:
During Harry and Sally’s divorce, the court ordered Harry to pay the $5,000 balance on the VISA card held in both spouses’ names. Months later, Harry was laid off from his job. He stopped paying the monthly VISA bill. Eventually, Harry noticed a “black mark” on his credit report after VISA reported the overdue balance to the credit reporting agencies. Sally noticed the same “black mark” from VISA on her credit report. How could that be? The court made Harry responsible for that debt, didn’t it?
Some Protection is Available if the Spouse Assigned Marital Debt Fails to Pay
Again, the court’s order only affected the rights and obligations “as between the parties.” A court has no authority to alter the contractual agreement between a creditor (e.g. VISA) and parties who signed a credit agreement. Yet, there are ways that Sally could have protected herself and her attorney should have discussed the options with her.
Balance Transfer / Close Joint Account
Continuing with our example, the best option would require Harry to transfer the $5,000 balance from the jointly held VISA card to a new card issued only in Harry’s name. Either ex-spouse then could close the VISA account since the balance would be zero. With the account closed, Sally would be fully protected. If Harry defaults on the new card, then it only affects him.
A second way to protect Sally would be to order Harry to indemnify Sally against any harm from any failure to pay the VISA debt. This might be the best and only option available if, for example, Harry’s credit rating wasn’t sufficient for him to qualify for a new card in his own name. If Harry drops the ball, Sally might still have to pay VISA to avoid any “black mark” to her credit rating. But, she would now have legal recourse against Harry since he was ordered to indemnify her against the harm.
Lien Against the Debt’s Collateral
A different form of protection would be available if the debt had been secured. A credit card, of course, is unsecured debt. Unsecured debt has no collateral. An unsecured creditor’s only recourse is to apply pressure by reporting the debtor to a credit reporting agency or suing for nonpayment. In contrast, a truck loan or home loan is secured debt. Failure to pay a truck loan eventually results in repossession of the truck. The same goes with eventual foreclosure on a home. Had Harry been assigned responsibility for secured debt, then the court could have awarded Sally a lien on the collateral for protection (e.g. a lien on the truck or home). Then, if Harry dropped the ball and Sally had to begin payments in order to avoid a “black mark,” she could foreclose her lien through the courts and get possession of the collateral. While the outcome may not be ideal in Sally’s eyes, she should at least be able to get possession of the collateral if she’s going to have to make payments in order to avoid a “black mark.”