When you are going through a divorce, its not just the property, the cars, and the bank accounts that have to be divided.
Secured and unsecured debt has to be divided too.
Unfortunately, the division of debt can sometimes be even more complicated than dividing assets. We’ll discuss how debt needs to be properly divided during a divorce, and then the differences between secured debt and unsecured debt.
How Is Debt Divided During A Divorce?
Assuming that you are not able to pay off all of your debt before you file for divorce, the court will have to decide how the debt will be divided and who will pay off which debt during the negotiations.
There are many obvious issues here, one of which could be that your ex-spouse may not pay what they are ordered to pay. If this happens you may be responsible for the payment of debt since lenders unfortunately do not recognize divorce court orders.
The best strategy will be to pay off as much debt as you can before you file for divorce. But if you are unable to do so, it will need to be divided, and you will need to understand the differences between secured and unsecured debt.
Secured debt means that the lender has the right to repossess property in the event that the loan is defaulted on. Examples of secured debt include car loans, boat loans, and loans on homes and real estate.
If the loan is in both you and your spouse’s name, it will need to be made very clear in the separation agreement who is responsible for making the payments on that loan. In the event that one spouse fails to make their end of the payments, the creditor will be able to go to the other spouse to seek repayments. The creditor can outright repossess the property if the other spouse fails to pay as well.
This is where you will need to be careful, a foreclosure or repossession of property can lead to damaged credit. Yes, your credit can be damaged if your name is on the property in this scenario.
Unsecured debt is the opposite of secured debt, meaning that the debt has no collateral for the lender in the event of a bankruptcy or a default on the loan.
Furthermore, unsecured debt is typically divided so that each spouse receives their “fair share” of the balance due. The division of any unsecured debt will also be largely dependent on whether the state in which you reside in is an equitable distribution state or a community property state.
An equitable distribution state means that you are responsible for all debts that have your name on them. If both you and your spouse have your names on property, then you are both responsible for paying them, including after your divorce.
A community property state on the other hand means that you are responsible for debt that incurred during your marriage, regardless of whether your name was on it or not. This means that even if your name was not on your mortgage, you’ll still have to help pay it off after the divorce.
Depending on where you live, there are several different outcomes for handling debt after a divorce. A great way to protect yourself is to refinance the debts settled during the divorce into the new owners name if possible. This way you will only be responsible for the debt you received.
If you need help organizing your finances during your divorce, you can grab a FREE Divorce Financial Documents Checklist below: