How to Handle Debt During Divorce

Sep 16

Divorce is never easy, and when it comes to the financial aspects of separating, things can get even more complicated. One of the most challenging parts of a divorce is dealing with shared debts, especially when both partners have accumulated financial obligations throughout the marriage. As you go through the process, managing debt effectively and dividing it fairly is essential for protecting your financial future. In this blog, we’ll explore strategies for handling debt during divorce, ensuring that both parties avoid financial hardship as they move forward.

Understanding Marital Debt

Just like marital assets, marital debt is shared between both spouses. In New Jersey, the principle of equitable distribution applies when dividing property and debts. This does not necessarily mean an equal 50/50 split but rather a fair division based on various factors, including each spouse’s financial situation, contributions to the marriage, and earning capacity.

Marital debt typically includes:

Mortgages
Car loans
Credit card balances
Personal loans
Medical bills
Student loans (in some cases)

It’s essential to understand what qualifies as marital debt and what is considered separate debt—debt incurred before the marriage or after the separation. Debt division can become contentious during a divorce, especially if one spouse feels burdened by the other’s financial decisions. It’s important to consult a divorce attorney early in the process to understand how the law will apply in your case.

Strategies for Dividing Debt During Divorce

Successfully managing debt during divorce requires careful planning and negotiation. Below are some key strategies to help ensure that debt is divided fairly and that both parties avoid financial pitfalls.

Inventory All Debts

The first step in handling debt during a divorce is to take an inventory of all debts that exist. This means gathering all documentation for shared debts as well as any individual debts. Be sure to review:

Bank statements
Credit card bills
Loan agreements
Mortgage and car loan statements
Credit reports

By doing so, both parties can have a clear picture of the financial obligations they share and the total amount of debt that must be divided. This information is critical for fair negotiations and for your attorney to determine how the debts will be distributed.

Identify Marital vs. Separate Debts

After taking an inventory of all debts, the next step is to distinguish between marital debts and separate debts. Marital debts are those that were incurred during the course of the marriage and typically benefit both spouses or the family as a whole. Separate debts are those that were incurred by one spouse before the marriage or after separation.

For example, if one spouse had student loans before the marriage, those loans are typically considered separate debt and won’t be divided during the divorce. However, a mortgage or joint credit card debt incurred during the marriage would likely be considered marital debt and divided accordingly.

Avoid Taking on New Debt

During the divorce process, it’s crucial to avoid taking on any new debt. Whether it’s through credit card spending or new loans, additional financial obligations can complicate the debt division process and increase the risk of financial hardship after the divorce is finalized.

If you and your spouse continue to share joint accounts, it may be a good idea to freeze them or close them to prevent one party from accruing more debt that the other could be held responsible for.

Negotiate Debt Division in the Settlement

One of the most effective ways to handle debt during divorce is to negotiate its division as part of the overall settlement. Ideally, the debts should be divided in a way that reflects both parties’ ability to pay and their individual financial contributions during the marriage.

For example, if one spouse earns significantly more than the other or has greater earning potential, they may be responsible for a larger share of the debt. Conversely, if one spouse has more assets, they may choose to offset their portion of the debt by retaining a larger share of the marital property.

An experienced divorce attorney can help you negotiate the debt division in a way that protects your financial interests and prevents undue hardship. Once the debt division is agreed upon, it will be part of the divorce decree and enforceable by law.

Refinance Joint Debt

For debts such as a mortgage or car loan, it may be possible to refinance in one spouse’s name if they intend to keep the asset. This way, the other spouse is released from liability for the loan, and the party retaining the property is solely responsible for the debt moving forward.

This strategy is particularly important for mortgages. If both spouses are on the mortgage and one intends to keep the home, refinancing can prevent the other spouse from being held responsible if payments aren’t made.

Transfer Debt to Individual Accounts

If you and your spouse have joint credit cards or personal loans, transferring the debt to individual accounts can be a practical solution. This way, each party is responsible for their own debt moving forward, and there’s no risk of one spouse damaging the other’s credit after the divorce.

Be sure to close any joint accounts as soon as possible to avoid complications during the divorce process. Credit card companies and creditors are not bound by divorce decrees, so if you leave joint accounts open, you could still be held liable for your spouse’s spending.

Use Assets to Pay Off Debt

If you and your spouse have significant marital assets, such as savings or investments, you may choose to use those assets to pay off joint debts as part of the divorce settlement. By doing so, both parties can move forward without the burden of shared debt and with a clean financial slate.

This strategy may involve selling a marital home, liquidating retirement accounts, or cashing out joint investments. Keep in mind, however, that certain assets, such as retirement accounts, may incur penalties if withdrawn early.

Consider Bankruptcy if Necessary

In some cases, the debts accumulated during a marriage may be too overwhelming for either party to manage. If this is the case, bankruptcy may be an option. Filing for bankruptcy can discharge or restructure debts, giving both parties a fresh financial start.

It’s important to consult with a New Jersey divorce bankruptcy attorney to determine whether bankruptcy is the right choice for your situation. In some cases, it may be advantageous to file for bankruptcy jointly before the divorce is finalized, as this can simplify the debt division process.

Working with a Divorce Attorney

Managing debt during a divorce can be complicated, especially when emotions are running high and financial concerns are front and center. An experienced New Jersey divorce attorney can help you navigate the process, ensuring that your debts are divided fairly and that you are protected from financial hardship.

Your attorney can:

Help you take an inventory of all debts and assets.
Assist in distinguishing between marital and separate debts.
Advocate for your financial interests during debt division negotiations.
Ensure that debt division is properly documented in the divorce decree.
Explore options such as refinancing or transferring debt to individual accounts.
Provide guidance on bankruptcy if necessary.

By working closely with your attorney, you can emerge from your divorce with a clear understanding of your financial obligations and a path forward for rebuilding your financial future.

Minimizing the Financial Impact of Divorce

Divorce brings about significant changes in many aspects of life, including how shared debts are handled. Whether you’re dealing with credit card balances, mortgages, or personal loans, it’s essential to approach debt division strategically to protect your financial interests.

By taking inventory of your debts, negotiating a fair settlement, and working with a skilled NJ divorce lawyer, you can navigate the process more smoothly and minimize the financial impact of divorce. At Hoffman Family Law, we’re here to provide the guidance and support you need to manage your debt and move forward with confidence. Contact our team to schedule a free consultation.