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The Divorce Encyclopedia
Dividing Debt (Creditor’s Rights)

Term Definition Dividing Debt (Creditor’s Rights) - great care required.
Application in Divorce Just as a couple must divide what they own, so they must divide what they owe. Here great care must be taken, because a misstep can ruin a credit rating.

In a community property state, a spouse is responsible for debts incurred in during the marriage and it does not matter whose name is on them. In an equitable distribution state, debts in one spouse’s name are his or hers alone, but a spouse is responsible for debts taken in his or her name, even those without his or her consent. In all jurisdictions, joint credit card debt is jointly owned.

In most equitable distribution states, little statutory guidance exists governing the classification and distribution of marital debts. The courts, therefore, must first determine that a debt exists, which means that there is an enforceable obligation to pay money to another. (When marriages crash, one spouse may fabricate marital debt as part of the jockeying associated with a favorable distribution of assets. In this routine, a gift to a couple made during the happier times of the marriage to help with, for example, the purchase of house, suddenly becomes a loan that up to the time of the marital breakdown was never repaid or serviced). Courts generally view undocumented transfers as gifts, not loans, and even if documentation can establish it as loan, absent a history of repayment, courts hold it to be a gift.

Generally, only marital debt is divided, which means any debt incurred for the joint benefit of the parties during the marriage. Joint benefit does not necessarily mean joint use.

Debts incurred in the hope of creating marital property are marital, "[as] those who share in the gain must share in the pain."

Not all debts incurred during a marriage, however, are marital. Debt incurred through gambling, high living and reckless investment may be not be a joint responsibility, even when the obligation occurred during the marriage. Debt caused by dissipation of assets Is not marital.

The use of marital funds for a paramour or girlfriend is dissipation.

Gifts to children, particularly if these bequests exceed those made in previous years, have been found to be dissipation, especially if the gift is made at the time of the marital breakup. Such gifts diminish the size of the marital estate.

Debt incurred after the classification of assets but before the divorce can be problematic. In general, living expenses paid after a separation are marital so long as these expenses are within the marital standard of living. In general, postclassification living expenses should be paid from separate income. In other words, after the classification of assets, ordinary living expenses should, if possible, be paid from separate property and income.

As a rule, secured marital debts must be offset by the value of the asset they encumber. Unsecured marital debt is allocated so that each spouse receives an equitable share of the net balance of the estate.

The classification of debt, like the classification of assets, is a preliminary to their distribution. Most jurisdictions hold that the debts must to allocated between the spouses, "apportioned with the same considerations of fairness and equity which apply to the distribution of assets." In distribution courts consider who incurred the debt and who benefited from it; which spouse is better position to pay it off; and the debt’s relation to a particular asset.

Community property states have special confederations for community debt. For example, a tax debt for community income can be classified as a community debt even when the Internal Revenue Services holds one spouse "innocent" of any wrongdoing.

Sometimes couples negotiating the terms and conditions of their divorce deal with it in one of three ways: One, they pay it all off when the property is divided; two, they continue to service it jointly; and three, they divide it and each take a share of responsibility. While option one may be difficult, it is probably the best course because it makes for a clean break and fresh start without a friction point between former spouses. Options two and three not only make for continued contact between former spouses, but also put one spouse’s credit at risk if the other defaults.

It is a wise idea to read the terms and conditions that come with credit cards. Even when one spouse agrees to take on a debt, if it has the other spouses name on it -- or in some cases, even it does not -- the creditor has the right to come after both spouses for payment. Put another way, credit card companies are not bound by a divorcing couple’s property agreement.

See also Debt; Children and Equitable Distribution; Creditors’ Rights; "During the Marriage"; Joint and Several Liability; Bankruptcy.

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