Ah debt. A four letter word indeed. When you and your spouse divorce, what happens to your joint debt? This blog explores your options for dealing with shared debt and includes a few suggestions for avoiding conflict about debt before divorce. 

Come to An Agreement and Put It In Writing

If you and your soon to be ex-spouse are communicating well AND the debt cannot be immediately paid off, AND you can trust them, create a written agreement about who will pay which debt.  This includes mortgage debt, line(s) of credit, auto loans, student loans, and credit card debt.

Remember that the creditor doesn’t care that you’re getting divorced. They only care that both of your names are on the account. You may call and ask that one of you be taken off the loan but unless the remaining account holder is in a better situation financially than they were when you both took out the loan, it is likely the creditor will deny your request.

As long as your name is attached to the loan - you are ultimately responsible. The agreement you make in divorce does not supersede the loan agreement. Even if you make an agreement, circumstances can change. So, as long as your name is on the account, make sure you can monitor whether payments are being made. Furthermore, make sure that the creditor has your current phone number, email and address so important notices can reach you. 

One Spouse Agrees to Buy the Other Spouse Out of the Debt 

If one or both of you is financially able, you could offer to buy the other spouse out of the debt. This means one of you gets a new line of credit or loan on your own, paying off the existing joint account(s). This might occur if you have a mortgage together and one person wants to, or is able to do a buyout to keep the house. However, in any buyout, each party bears a risk. The selling spouse could lose out on future appreciation, and the buying spouse may end up feeling the price was too high if the property depreciates in the future. 

There is more than one way to buy out your spouse’s interest. The buying spouse either refinances the house and takes out a new mortgage loan—or gives up other marital property worth about as much as the selling spouse’s share. For example, one spouse might keep the house in exchange for giving up his or her share of marital investments and retirement accounts.

Settle Up the Debts and Never Worry About It Again

If you are able to make money on the same of the marital home, you can agree to pay off your joint debts and you avoid having to keep track of whether your ex is making payments. It is prudent to walk away from divorce debt free, when possible.  If it is not, make sure you have protections in place to guard your credit.

What if the home is the joint debt but one or both of us wants to stay? 

If the joint debt is the home and neither one of you can afford to make the payments alone, you may be faced with a choice to: 

• Sell the home and split any proceeds to fund the purchase of your separate homes.
• Continue to make payments on the home with both of you continuing to live there until one of you can afford to take on the payment. 

If Divorce is Looming and You Share Debt

1. Make sure you have access to all jointly held accounts. This can be accomplished by creating an account or registering on the creditor’s website. You may need to call and verify the information you originally submitted to the creditor. 
2. Devise a plan to pay your share of joint debts BEFORE your divorce is finalized. Avoid having to create a debt division agreement by wiping the slate clean before you meet with a divorce attorney or mediator. 
3. Stop making charges on your joint credit card. If you absolutely need to use a credit card, open up a credit card in your name only. 
4. Understand if you or your spouse are an authorized user or if you both jointly hold the account. There’s an important distinction because if one spouse is an authorized user, the primary account holder could put a spending limit on them, which they couldn’t do if the spouse jointly holds the account. 
5. As a joint account holder, a credit card company usually won’t remove your name or your spouse’s name from the account. You could, however, close the account and keep the other cardholder from adding any other charges to the account.

Empowered by Education

At the Divorce Resource Centre of Colorado, education is empowering. Here's a related blog post where you can download divorce related financial documents.

Please schedule an initial consultation to discuss your unique situation. We can also be reached at (303) 468-5626.