Smart Money: What happens to debt after divorce?

Financial issues are a common issue within a marriage. For example, one spouse runs up credit card charges and incurs a significant amount of debt. So, if a marriage ends in divorce, whatever the cause, is the other spouse responsible for repayment of debts incurred by the other spouse during marriage? The answer depends on the circumstances.

In Nevada, all assets from a marriage are considered “community property.” Under community property laws, assets are divided equally upon divorce. This means everything you own and everything you owe, either together or even separately, gets divided pretty much down the middle, unless there is a good reason as to why it shouldn’t be, and unless the property in question falls under an exemption. However, debts must be divided in a divorce as well.

A court’s decision on how to split debt may also be impacted by dispersal of other assets, such as property. If one spouse is receiving a majority of the positive financial assets, such as the family home or an expensive vacation property, they may also be assigned a majority of the couple’s debt. Similarly, if one spouse leaves the marriage with a much higher earning potential, they may also walk away with a majority of the shared debt.

Daniel S. Judd

 

However, separate debt incurred by one spouse prior to the marriage may not be the responsibility of the non-borrowing spouse. In addition, debt incurred by one spouse using separate property as collateral may not be the responsibility of the non-borrowing spouse in some circumstances.

If the spouses entered into a prenuptial or premarital agreement, that agreement may address allocation of debt in the event of divorce. In that situation, the provisions of the agreement are likely to determine the division of debt after a divorce.

Finances can become strained by divorce, so if possible, it is best to find a settlement that is debt-free. You risk filing for bankruptcy if you continue to hold onto property you cannot afford and debt that is difficult to repay.

If it is impossible for you and your spouse to walk away from your divorce debt-free, take precautions so that you are not impacted by their financial circumstances once the divorce is finalized.

Ask your attorney about adding an indemnity clause to your divorce decree. Even though joint debts are split by the court, creditors are still legally allowed to pursue anyone whose name is on an account. And sometimes when accounts hold debt, it is difficult to remove a name until the debt has been paid. An indemnification clause will state that one spouse is responsible for this particular debt, and it will list the spouse's name and the name of the creditor. It will also state that the other spouse is not responsible for this debt. By adding a clause like this for each debt that will remain in a joint account, you will have protection over debts that you are not responsible for.

Additionally, be sure to remove your name from old accounts when possible, or close them and create new ones.

If your former spouse begins to miss payments and you are being pursued by their creditors, there are a couple of options. You can ask the court for assistance in enforcing the divorce agreement with your spouse, or you can make the payments yourself and ask the court for reimbursement. This language must be contained in the decree.

Sometimes there is no option other than bankruptcy. If you must declare bankruptcy because you cannot pay your share of debt from a divorce, keep in mind that you will still need to pay any court-mandated child and spousal support.

The best resource for answers to your questions about property division and divorce in general is an experienced Nevada family law attorney. Your lawyer can help you understand what you are likely to receive from the marital estate, implement a strategy for your divorce, and finalize your divorce as quickly and amicably as possible.

Allison MacKenzie has served a variety of clients on a local, statewide and national level for over 50 years. The firm offers a diverse offering of practice areas, with a demonstrated dedication to providing comprehensive legal service, delivered in a professional manner. Though the firm is located in Carson City, Allison MacKenzie’s work spans across the state.