What Happens to Debt in Divorce?
01 June 2016IN: Family Law
Understanding the complexity of dividing debt in divorce
During divorce, the couple must split up not only assets that they have acquired since being married but also debts that they have incurred. Like with many aspects of family law, the couple may reach an agreement regarding how they want to split up their debt, or they may ask the court to make this determination.
Definition of marital debt
Marital debt has been defined by the Tennessee Supreme Court as being any debt incurred by either spouse or both spouses during the course of their marriage and up until the date of their final divorce hearing. Any marital debt must be split as part of the divorce proceeding, including debt that was incurred after a spouse has moved out of the family residence. The court uses a definition of debt in a manner similar to how marital assets are characterized. However, assigning debt to the spouses follows a different analysis than assigning property.
Analysis to divide debt
If the court is tasked with dividing marital debt, it is instructed by the Tennessee Supreme Court to consider the following factors:
- The purpose of the debt
- The party who acquired the debt
- The party or parties who benefitted from incurring the debt
- The identity of the party best situated to pay the debt
Additionally, the court usually assigns the debt to the party that acquires the asset associated with it. For example, a spouse who receives an automobile that still has a car loan will also receive responsibility for the car loan. Tennessee uses an equitable distribution system to divide marital property, meaning that each spouse may not receive exactly half of the property so long as the division is equitable or fair. The divorce order will include information pertaining to which spouse is responsible for specific debts.
Orders regarding acquisition of debt
The spouses are not typically restricted in their ability to buy, sell or transfer property while their divorce case is pending. However, either spouse may ask the court to make orders regarding these actions if he or she believes that the other spouse will try to financially harm him or her. A court can make an order that prohibits either spouse from excessive gambling, making risky investments, foolishly spending money or using money for ill purposes.
Division’s effect on creditors
The divorce court does not have jurisdiction over the couple’s creditors. Therefore, even if a court orders one spouse to pay certain debt, this order is not binding on the creditor. The creditor can still go after the other spouse if the primary account holder cannot or will not pay off the debt. Spouses may wish to take proactive steps to protect their credit, such as closing joint accounts and placing a freeze on accounts. Additionally, periodically reviewing credit reports can help alert spouses to any potential problems.