Divorce is hard enough; having to deal with splitting assets and debt can be even more draining. Most couples have some sort of debt in the form of mortgages, car loans, personal loans, and so on, which ought to be divided in the divorce process.
Determining who pays for what debt is not always very straightforward. Many factors go into deciding how debts are handled after a divorce.
Firstly, some debt will stay with the person who incurred it, and some debts will be allocated to the property pool and divided between both parties.
In most cases, the preference is that debt is paid as part of the asset settlement. Other factors influencing how debt is split in divorce are as follows.
Custody Arrangement
If children are involved in a marriage, and one spouse is given primary custody of the children, they will need more financial support than the other spouse. As such, the spouse with primary custody gets to pay a smaller portion of the debt to be in a better financial position to care for the children.
Ensure you have a divorce attorney in Annapolis present before agreeing to such an arrangement.
Binding Financial Agreement
In cases where there were binding financial agreements, the court will typically follow the agreement’s provisions when splitting assets and debts. These financial agreements may include
- Prenuptial agreement
- Postnuptial agreements
- Cohabitation agreement
However, if the court deems the provisions in the agreement as inequitable and unfair or believes one party agrees under duress, then the agreement won’t hold up.
Purpose of Debt
The court also considers the purpose of the debt, whether it is for the benefit of the relationship or not. It doesn’t matter whether the debt is in one spouse’s name or both; if it benefits the relationship, it is treated as a property pool and split between both parties.
Ownership of Asset
If the debt is incurred on an asset, and a spouse has full ownership of that asset, for example, rental property, that spouse with full ownership of the property will have to cover payment of the full debt. This also applies to cases of mortgages.
Wasting Asset
In a situation where the debt is incurred due to the extravagant spending of one spouse, the court considers it a wasteful dissipation asset, such as excessive gambling, lavish vacations, drugs and alcohol, and so on. Whoever is responsible for that waste will be held accountable for paying off the debt.
Tax Debt
Unpaid taxes are standard and are treated as debt during divorce. Often, the court treats unpaid taxes as marital property, as the relationship benefits from the income. However, the court will also consider who bore the responsibility for the tax liability in the first place.
Business Debt
In cases where the debt is incurred from a business and both spouses are a part of the business, the debt is treated as family property, and both spouses are responsible for the debt. This situation is common amongst small businesses and sole traders where personal and business money are intermingled.
