Marital debt is considered a marital asset upon a divorce. Communal property states like Arizona make all marital debt the responsibility of both spouses and evenly split it among the separating spouses. Non-communal states have equitable distribution laws to handle debt. In any case, debt is a major concern when separating. Even if a divorce decree declares who is responsible for the debt, in the end, the creditors may not care. If a couple is deeply in debt and is also considering a divorce, there are several ways to handle the debt in question:
1. Make a Full Financial Disclosure During Negotiations
In community property states, all debt accrued during a marriage is considered joint debt, as mentioned above. This includes debt acquired by one spouse without the other’s knowledge, explains Canterbury Law Group attorneys. Yes, a divorcing spouse could end up being responsible for the debt he or she didn’t even know about. However, this rule is not set in stone. A lawyer could argue successfully on behalf of a spouse in this situation. To do that, the spouse needs to provide evidence of lack of knowledge. This requires a full financial disclosure during the negotiation stage without holding anything back. Provide details such as account numbers so that a judge may review them and consider making some joint debt the sole responsibility of the spouse that accrued it.
2. Add an Indemnity Clause to the Divorce Settlement
An indemnity clause could protect one spouse if the other doesn’t pay what’s owed on time. Keep in mind that creditors are not bound by divorce decrees. Creditors can come after both spouses regardless of who ends up being legally responsible for the debt after the split. To protect yourself in this scenario, request your lawyer to draft an indemnity clause that allows one spouse to take the other back to court in case of missed payments. If the debt is about to go into default, an indemnity clause will protect you.
3. Include Terms of Refinancing in the Divorce Settlement
If there’s an outstanding loan on an asset, like a vehicle or home, then the refinancing options can be complicated. If the soon-to-be-ex is going to own the asset but the loan has both your names, it’s best to have your name removed from the loan. This happens when the separating spouse refinances the loan. Some spouses do not do this on time and the spouse without the asset will end up being burdened by the debt. Therefore, make sure there is a time period in the divorce decree under which the refinancing needs to happen. For example, if the other spouse keeps the car, make the refinancing period six months. If the spouse doesn’t refinance during that time, the car will be put on the market by default. Such a clause is a good motivator to get spouses to refinance loans on time without risking losing the asset, according to Canterbury Law Group.
It’s highly recommended to pay off as much marital debt as possible before filing for divorce. Such debt can get caught up in negotiations and become a serious problem. If the spouses are seriously in debt, consider bankruptcy before filing for divorce. Chapter 7 bankruptcy may discharge certain unsecured debt, thus relieving some of the debt issues for the couple.