Divorce and Spousal Debt Liability

Spousal debt liability is a subject that is often over looked during divorce, but one that can have serious consequences afterwards.

By WomansDivorce.com | Answer by Timothy McNamara, Divorce Financial Analyst

When it comes to dividing debts in divorce, it’s important to understand who is ultimately responsible for repaying the debt. There are 5 factors that will determine whether you are liable for your spouse’s debts after divorce:

1. When the debt was incurred

Generally, debts incurred before the marriage are considered separate debt owed by the person who incurred the debt. It is important to note that most debts incurred after a legal separation are generally considered a separate debt as well.

2. If the debt is a joint or co-signed debt

If you and your spouse applied for a loan or mortgage together, you share equal payment responsibilities. The same principle applies if you are a joint account holder on a credit card. After a divorce, both you and your ex will be equally liable for the debt.

If a borrower can’t qualify for a loan due to poor credit, that person may still be able to get a loan if some else co-signs the loan. The co-signer essentially agree to take responsibility for the loan if the borrower fails to make the payments. If you co-signed for a loan with your spouse, both of you are equally liable for repayment of the debt.

Even if one spouse was awarded the debt in a divorce, both spouses will remain liable for the debt until it’s repaid. The original mortgage agreement, loan contract, or credit card agreement will supersede your divorce decree.

3. Spousal debt liability in community property states

Spousal debt liability depends on if you live in a community property state or an equitable distribution state.

In community property states (AZ, CA, ID, LA, NV, NM, TX, WA, and WI), both spouse are liable for debts incurred during the marriage, regardless of which spouse incurred the debt. This comes as a shock to many people when creditors hold them responsible for their ex-spouses debt after divorce.

This can happen even if a person was unaware of their spouse’s debt or if they didn’t sign an agreement with the creditor. Even if your ex was ordered to pay off a joint debt in your divorce agreement, the creditors can still come after you if your ex fails to make the payments.

4. Spousal debt liability in equitable distribution states

In equitable distribution states, debts incurred during the marriage are generally divided by the court in a fair and equitable manner. For example, if a credit card in one person’s name is used for family necessities, the court may divide that debt in the divorce.

As far as creditors are concerned, debt liability falls to which spouse incurred the debt. If the debt is in one spouse’s name, that spouse is liable for repaying the debt. Creditors aren’t bound by the divorce and can’t go after the other spouse for repayment of the debt.

There are exceptions in which both spouses are liable for debts. These include debts for family necessities like shelter, medical bills, or tuition for the kids. Tax liabilities are another type of debt that may be split equally between the spouses if it was incurred during the marriage.

5. The type of debt that is owed

Regardless if you live in a community property or equitable distribution state, some debts may be considered community debt. If your state follows the doctrine of necessities, you may be responsible for your spouse’s medical bills. To be liable for your spouse’s medical debt, the creditor must prove:

Medical services were provided to your spouse;
These services were necessary for the health and well-being of your spouse;
You were married to your spouse when the medical services were provided;
Payment for the medical services hasn’t been made.

Twelve states (AL, AK, AR, FL, GA, ID, MD, MI, MS, UT, VT, and WA) have no doctrine of necessaries for spousal debt. In these states, creditors can’t come after a person for their spouse’s medical debt if it was incurred during the marriage. (1)

Since state law regarding the doctrine of necessities varies by state, you will need to consult with a lawyer to find out if you could be liable your spouse's medical bills.

6. Any prenuptial or post-nuptial agreements

If you signed a prenuptial agreement before your marriage detailing how debts will be divided, this will take precedence over state law regarding debts in divorce. The same is generally true for post-nuptial agreements. Post-nuptial agreements are common when a spouse buys property they want to remain solely in their name backed by a separate loan.

If you agree to pay your spouse’s loan in prenuptial or post-nuptial agreement, the court will generally hold you liable for the debt when you get divorced. It’s important to note that creditors are not bound by these agreements.

How to protect your assets from spousal debt liability

The following question highlights how you can protect some of your assets if you are found liable for your spouse's debts.

Audrey's Question: My husband borrowed large sums of money during our marriage from several different people. I only became aware of these debts when we began divorce proceedings. They were done as verbal agreements. Am I now responsible for 50% of them?

Timothy's Answer: While your husband may be telling the truth about the loans for his business, I would certainly be wary of any debt incurred without proper documentation. Very often when people go through a divorce, one or both parties claim phony business or personal loans in an attempt to hide assets from their spouse. You should consult an attorney immediately regarding your rights.

Verbal contracts can sometimes be enforceable depending on the type of contract it was, the dollar amounts involved and the laws in your state. Your attorney will attempt to determine the nature and term of the supposed liabilities, whether any collateral was pledged against the asset and if the loan was made for personal or business reasons.

If the loans are verified and enforceable in your state, it very well may end up affecting you regardless of the fact you were not aware of the loans. For instance, if you default on a credit obligation and you own a home, a creditor or individual holding a note can put a lien against your house or file a lis pendens (pending lawsuit) which could tie up your home in litigation for years and prevent you from being able to sell your home.

However, if a creditor tries to seize your assets, you may have some level of protection for your assets. A Homestead Declaration is a legal agreement, which if filed, can protect a portion your home’s value from creditors (the amount differs by state). For example, if someone incurred an overwhelming gambling debt, a portion of their home's value would be protected. This way, if a judgment is entered against your husband and his debts are forced to be re-paid, at least your home will be protected.

As far as any other assets you may own, unless either of you had structured in advance certain asset protection tools such as family limited partnerships or LLC’s, then all of your assets would be vulnerable to any creditors.

If you end up receiving a settlement from your divorce, you should look into protecting your assets. Having your assets protected will ensure you never have to worry about a situation like this in the future.