Separating finances is a key element of any divorce. People often focus their attention on asset division. They want to ensure they have enough savings to rebuild. While this is an appropriate goal, it can be a major mistake to rush through the debt division process.
The marital estate consists of not just the income and assets accumulated during the marriage but also any debts incurred while married. Spouses have to divide responsibility for their financial obligations. Those preparing for property division negotiations need to be aware of the three major risks described below to protect themselves.
The potential inclusion of inappropriate debts
The date when people take on the debt is usually the most important factor when dividing financial responsibilities. Any debts taken on during the marriage are usually part of the marital estate. Even a credit card, medical debt or student loan in the name of one spouse is technically the responsibility of both. Obviously, joint loans such as mortgages, car loans and shared credit cards are the responsibility of both spouses.
However, people can sometimes exclude certain debts from the marital estate. If one spouse racked up a significant debt as a means of diminishing the marital estate, then it may be possible to exclude those debts from division. People can also hold their spouses accountable for debts accrued in secret, especially if they were taken on as part of an extramarital affair.
The risk of having too much debt
Another important consideration for those dividing marital debt is what they can actually afford. It can be much harder to maintain financial flexibility when supporting two separate households with the income previously combined to support one combined household. Spouses often need to look carefully at their cost of living expenses and income to determine how much debt they can reasonably accept. They may have to negotiate carefully and make concessions regarding property division to ensure they only take on a sustainable amount of debt.
The possibility of a spousal default
Particularly in scenarios where the debt is an account in the name of both spouses, people have to address the possibility of a spouse defaulting on their obligations. The spouse ordered to pay certain debts could fall behind on payments or might file for personal bankruptcy. At that point, creditors might target the other spouse for collection purposes. Even with a family court order allocating responsibility to one spouse, the other spouse may still be accountable for certain financial responsibilities.
Employing a measured and goal-oriented approach to property and debt division can be beneficial for those preparing for divorce. A division of marital debts often requires very careful consideration, even though many people treat debt as an afterthought once they have divided their marital property.
