How Debt Is Handled During a Divorce

Recent statistics show that the average American household carries roughly $67,000 in consumer debt. This can be a thorny problem when the couple is in the process of getting divorced with a variety of different possible outcomes. In New Jersey, you cannot simply assume that this debt will be divided exactly down the middle.

The Marital Estate Includes Both Assets and Debts

Settling and dividing the marital estate means more than just deciding who gets what from the couple’s total property. This is because the marital estate is not just limited to the assets acquired during the marriage. It can also include debt that was incurred during the marriage. Debt is also subject to division, just like property.

Exactly how the debt is divided is a part of the divorce negotiation process. Many people go into the process afraid that they may be stuck with paying their spouse’s debt for the rest of their lives. This fear stretches to the debt that the other spouse brought into the marriage, such as their student loan repayment. Thankfully, New Jersey laws are such that this fear should not keep them awake at night and your divorce lawyer can help you understand these laws.

The Law in New Jersey Is Equitable Distribution

As your family lawyer would explain, New Jersey is not a community property state. In those jurisdictions, you would have the most to fear from the other spouse’s debt. There is a higher risk that you could get stuck with their repayments in those states. New Jersey is an equitable distribution state when it comes to property and debt.

In the property context, this would mean that assets are divided equitably based on a number of factors. In the debt context, it means that the spouses are each liable for the debt that they incurred during the marriage and were incurred for marital purposes. Regarding the debt that each spouse brought into the marriage, they are each responsible for their own debt. Thus, if your spouse had college or graduate school debt from before the marriage, they are still responsible for it after a divorce. You are not. However, if they incurred this debt during the marriage, it is a different story, especially if your name is attached to the account.

Debt Is Not Always Divided Down the Middle

However, this does not tell the entire story of debt. There is a balancing act that is required when figuring out who needs to pay what debt. The easiest thing to do would be to split the marital debt right down the middle. However, that does not tell the whole story, nor may it be fair.

Hypothetically, there could be one spouse who has serious problems with money. This could have even been the root cause of the marital breakup since many couples end up fighting over finances. This spouse could have run up many thousands of dollars in credit card debt for non marital purposes. In this situation, these are precisely the circumstances for which equitable distribution was intended. It would not be fair for the spouse who may have been better with money and not acquired this debt to be forced to pay for it.

In a community property state, there would be few questions asked, and the spouse would need to pay half of any debt incurred during the marriage. This is where New Jersey law is more equitable. In this case, if the couple was not able to come up with a solution of their own, a judge would need to rule about the responsibility for the debt. Your divorce attorney would present arguments why you should not be responsible for someone else’s spending problem.

If the case reached a decision, a judge would be free to consider factors such as who incurred the debt, why it was incurred, and for what purpose in making a ruling. The court would be looking first at l fairness and equity.

Ability to Repay Is a Factor in Deciding Debt Responsibility

There are other factors that may come into play in dividing debt that also relate to fairness. There may be other valid reasons not to split the debt exactly in half. For instance, there may be a wide disparity in the income between the two spouses. They may have run up the debt jointly. Nonetheless, one spouse would be in a much better position than the other to repay the debt. This would be a reason to assign more of the debt to one spouse. It would simply be unfair to give an equal share to repay to the spouse who may struggle to earn enough money to meet their repayment obligations.

In addition, there is also a question about the debt incurred between the date of separation and the filing of the divorce complaint. The marital estate only ends when the divorce complaint is filed. Of course, the safest way to handle this is to take steps to close down joint accounts during the separation period. This would reduce the individual risk to each spouse that the other could incur debt in their name for which they would be responsible.

Consider Closing Down Joint Accounts at Separation

As soon as you decide to separate, one of the first things that you may need to do is take action about these accounts. As much as you might want to trust the other spouse, there is simply too much at risk. Assuming that your name is still on the account, you might be obligated to pay some of the debt. While a court may not assign you half of the debt, it may still consider it as marital debt that you should have a hand in repaying.

To the extent that your name is still on an account, you should request verification that your spouse is making the scheduled payments on the account. The last thing that you want is to be surprised by late payments and interest after the divorce is finalized. Then, there is little that you can do to recoup money from your ex-spouse. This could also leave a large dent in your credit rating, just as you may need to be using credit to get life on your own started. In this regard, being proactive and vigilant is the name of the game. Contact a family law attorney to learn how you can further avoid any financial pitfalls during the separation. Generally speaking, the status quo remains in effect from the time a couple decides to divorce up until the entry of the Final Judgment of Divorce.

Maintaining the status quo often keeps the peace and ensures fairness.  However, speak to your lawyer about your status quo and what is best for your particular case.

Consider Agreeing to Pay Back Debt

When you discuss this with a family law attorney, they will tell you that the best way of minimizing some risk and making the situation less complicated is to agree to pay back debt during the divorce proceedings. You could jointly agree to liquidate some marital property in order to completely close credit accounts. This would make some financial sense, especially if the debt comes with a high-interest rate attached. This could save both of you money in the long run. It could also make the divorce slightly easier and reduce the number of issues that you could fight about in court.

As you can see, debt in a divorce is a complicated matter that would benefit from the advice of a divorce lawyer. Call Jeralyn Lawrence at the New Jersey firm of Lawrence Law at (908) 645-1000 to learn more about how your debt could be affected by your divorce. Our Red Bank and Watchung divorce attorneys are able to speak with you at an initial consultation.