Debts in a Divorce: Who Owes What?
Some couples heading towards divorce are so focused on the assets acquired during the marriage that they fail to consider the debts until the last minute. Unfortunately, not factoring in the marital debts from the beginning could result in serious consequences, including you being responsible for your spouse's debts. To help with your assessment, here are some considerations to make.
Do You Live in a Community Property State?
Whether or not you live in a community property state can have a significant impact on how responsible you are for debts acquired during your marriage. In a community property state, such as Texas or California, both spouses are usually considered to be legally responsible for the debts incurred during the marriage. Even if your spouse is the only one who signed for a line of credit, for example, you could be on the hook for the debt.
There are some exceptions allowed in certain situations. Some community property states do allow the court to further examine the debts to determine who incurred the debt and the reasoning and make a determination on whether or not both spouses should be liable. If the judge feels that the debt was more your spouse's than yours, there is a chance that your spouse would be responsible for it, even if you live in a community property state.
For instance, if your spouse took out a loan to help pay off his or her mother's home, this debt could be viewed as only beneficial to your spouse. As a result, the responsibility for it could rest squarely with your spouse.
Do You Live in a Common Law Property State?
If you live in a common law property state, you are not responsible for debts that your spouse has incurred. However, both spouses are responsible for debts created as a couple.
For instance, if you and your spouse bought a home, both of you would still be liable for the remaining mortgage loan.
What If Your Spouse Files for Bankruptcy?
If you live in a community property state, your debts will also be discharged if your spouse files for a Chapter 7 bankruptcy. However, your assets are also subject to being seized by the bankruptcy trustee. The trustee would have the power to sell those assets to help pay off the debts owed to creditors.
However, if you live in a common law property state, your spouse would be the only one to benefit from the filing since your debts are considered to be separate.
Consult with a divorce attorney, like one from Gearing Rackner Engel And McGrath LLP, to learn more about splitting debts and find out how you can potentially protect yourself from owing your spouse's debts.