What Happens to Debt After Divorce

What Happens to Debt After Divorce

Posted on June 29th, 2018

In Nevada, all assets from a marriage are considered “community property”. Under community property laws, assets are divided equally upon divorce. However, debts must be divided in a divorce as well.

Any debt that either spouse has incurred during their marriage is considered part of their community assets. This means that debts in either name will be divided 50-50. Even if only one spouse signs for a loan on a purchase or accrues personal credit card debt, both spouses will be held financially responsible. This is also true for debts your spouse may hold that you are unaware of.

Debt incurred prior to a marriage is not considered community property. For example, if one spouse holds student loans from before they were married, that spouse will be held solely responsible for their earlier loans. However, if the other spouse happened to co-sign onto the loan account at some point during the marriage, that may alter how the court views the loan responsibility.  Additionally, if any part of the student loan was used for community living purposes that portion may be considered community property debt.

A court’s decision on how to split debt may 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.

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

When 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 settlement. 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 indemnity clause can protect you if your spouse defaults on their payments. Your attorney may also be able to add in clauses that require joint loan items to be refinanced in one name. Additionally, be sure to remove your name from old accounts when possible, or close them and create new ones.

If your former spouse is missing payments and you are being pursued by their creditors, you have 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 to help you get reimbursed for them.  This language must be contained in the decree.

Sometimes there is no option other than bankruptcy. If you need to 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.

For personalized advice on navigating debt in divorce, call us today.