Divorce can be a complex process with various aspects to consider. One particularly complicated aspect is the handling of debts when a marriage ends.
Debt division during a divorce can have a lasting impact on both parties’ financial well-being, so it is necessary to understand how this process works.
Identifying and categorizing debts
The first step in managing debts during a divorce is to identify and categorize them. Marital debts are typically either joint debts or separate debts. Joint debts are those incurred by both spouses during the marriage. These can be mortgages, car loans or credit card balances opened jointly. Separate debts are obligations taken on by one spouse individually, like student loans acquired before the marriage.
In most divorce cases, the court will divide debts through a process known as equitable distribution. This does not always entail a 50/50 split. Instead, it aims for a fair and reasonable division based on various factors. Courts consider factors like each spouse’s financial situation, contributions to the marriage and the nature of the debts when making these decisions.
Determining who is responsible for each debt can be a complex task. Keep documentation on hand that clearly shows who incurred the debt.
Creditors and agreements
Divorce agreements or court orders specify which party is responsible for each debt. However, creditors are not bound by these agreements and can continue to hold both parties liable for joint debts. Be sure to communicate with creditors and make arrangements to transfer responsibility or close joint accounts. This can help prevent negative impacts on credit scores and protect both parties from future financial disputes.
Protecting your credit
Maintaining a good credit score is good preparation for both spouses post-divorce. Late or missed payments can damage credit, making it harder to secure loans or credit in the future.
Studies suggest that as many as 86% of couples start out in debt. If you fit in that demographic, or if you accrued debt during the course of your marriage, it is important to take the right steps to handle it during your divorce.