Divorce is a complex process, and the division of debts is often one of the most contentious aspects. Understanding how your state handles debt division is crucial for a fair and equitable outcome. Whether you reside in an equitable division state or a community property state significantly impacts how your financial obligations will be allocated. This blog post will delve into the nuances of equitable division versus community property, explore the different types of debts, and provide practical recommendations for navigating debt during a divorce. By understanding these distinctions and implementing best practices, you can better protect your financial future and achieve a more secure post-divorce life.
Like how the division of assets is determined, the state in which your divorce takes place matters for how debts are divided. Specifically, states are either separate property states or community property states.
In separate property states, or equitable division states, debts and liabilities are divided based on what is determined “just” or “equitable”. Equitable, however, does not mean the same thing as equal. Various factors are considered to determine the fair division of debts. Fairness and the ability to pay are often prioritized over an equal distribution of debts. For example, in Missouri, courts consider the following factors:
Economic circumstances of each spouse: The court will evaluate each spouse's current and future earning potential, education, and overall financial health.
Contribution to marital property: This includes both financial contributions and non-financial contributions, such as homemaking, childcare, and supporting the other spouse's career. The value of these contributions is often a significant factor in determining an equitable division.
Value of nonmarital property: Assets owned by each spouse before the marriage, or received as gifts or inheritances during the marriage, are generally considered separate property and may not be subject to division. However, the value of these assets can still be a factor in determining the overall equitable distribution of marital property.
Conduct of the parties during the marriage: In some cases, marital misconduct, such as infidelity or financial mismanagement, can be considered by the court when dividing assets.
Custodial arrangements for minor children: The financial needs of children are a priority. Custodial arrangements and child support obligations can significantly influence how assets are divided.
Conversely, in community property states, the aim is for an equal (50/50) division of community property. Community property generally includes all debts acquired during the marriage, regardless of which spouse earned or acquired them. Separate debts, such as those incurred before marriage, are generally not subject to division. Nine states operate under community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
You should also document all debts that are owed by each spouse that may be determined separate and non-marital debt. Consult with your attorney on the rules in your state for determining what might be considered non-marital debts. Commonly, debts that were incurred prior to the date of the marriage are considered nonmarital. Moreover, you should also try to determine whether any non-marital debts were paid from marital assets or income earned during the marriage. Consideration may be given to the balance of the separate debt on the date of the marriage, and the balance that remains today. In some states, the balance of non-marital debts paid with marital assets are factors considered when determining the settlement agreement. For example, in Kansas, the Johnson County Bar Association states in their Family Law Section Financial Considerations:
“Where marital assets or income earned during the marriage are used to satisfy the premarital debts of a party, including but not limited to student loans, the amount of the debt at the time of the marriage (to the extent satisfied during the marriage) should be considered and distributed to the debtor as a part of the debtor’s ultimate share of the marital assets pursuant to the factors set forth in K.S.A. 23-2802 (2012).”
The character of the debt must also be considered. Characteristically, debt is either secured or unsecured.
Secured debt means that the debt is established, and secured by, the value of an asset. Common examples of secured debts include mortgages and car loans. Typically, the spouse that will receive the asset in a divorce will also be responsible for paying the associated debt.
Unsecured debts are all other debts. These are personal debts that are not collateralized by any specific asset. The repayment of such debts is simply based on the promise of the individual(s) named in the debt agreement. These debts include credit cards, student loans, and personal loans.
Credit Cards
When you go through the process of listing all the assets and debts in the marital household, you should also make a note of who is listed on the debt agreements. Credit cards may be held jointly, individually, or in one name with an authorized co-signor.
Generally, credit card balances incurred for the benefit of the household are considered marital property. However, you should speak with your attorney to discuss the specific state rules that apply when credit cards are individual, or when cards are used for purposes outside the benefit of the household. For example, credit cards that are incurred in secret for individual purchases or spending by one spouse. In these cases, different rules may apply.
Mortgage and Home Equity
As noted earlier, mortgage and home equity debts are secured against the value of the residence. In these cases, the party that receives the residence in the divorce typically remains responsible for payment of the mortgage debts.
In cases where equity was taken out of the home and used for other purposes not related to the home, those purposes and estimated spending amounts should be documented. First, there may be tax implications for the deductibility of mortgage interest. Under current law (in 2025), according to the IRS, interest on mortgage balance traced for purchases for anything not used to “buy, build, or substantially improve the residence” is not deductible for tax purposes. Moreover, how the home equity loan dollars were used should be brought to the attention of your legal team when discussing the property settlement.
Auto Loans
Auto loans are also secured debts. Typically, the spouse that retains the vehicle remains solely responsible under the divorce agreement for repaying the associated loan.
Business Debts
Owning a business in a divorce adds a lot of complexity. One reason is that the business may also have debts it is responsible for. These debts may be secured against assets owned by the business, such as equipment, or be unsecured such as a line of credit with a bank.
The first step for any business loans is to determine how the business ownership is structured, and whether any personal guarantees for business debts exist. It is quite common for banks to require personal guarantees for business debts from the business owners, and often, their spouse. The loan agreements should be reviewed and documented as well. In some cases, changing the ownership structure of a business (as often occurs during a divorce) may violate certain debt covenants with the bank.
Generally, the spouse who retains ownership of a business will be responsible for paying the business debts. However, careful planning is required for each individual debt of the business to ensure that you remain compliant with the loan agreement and determine how each debt will be handled in a divorce.
Student Loans
States vary with how student loans are considered in a divorce settlement. Consult with your attorney to determine how student loans are handled in your state. In some cases, student loans incurred before a marriage are considered separate property and those incurred during the marriage are marital, regardless of whether both spouses are on the loan agreement. However, in some cases it may also depend on how the loan dollars were used. Treatment of loan dollars that are used for tuition and direct education expenses may differ from those dollars used for living expenses. As such, it may be beneficial to estimate and document how the loan dollars were used.
Liability for debt incurred during a separation, and before a divorce is finalized, varies by state. Some states recognize these debts as martial, where others treat this debt as the responsibility of the spouse that incurred the debt. Consult with your attorney to determine how these debts are handled in your state.
Recommendation # 1. Request to be removed from debts no longer responsible for under separation agreement.
It is important to understand that for debts you are listed on but not responsible for under your separation agreement that the lender may still try to hold you responsible for the debts. According to the Consumer Financial Protection Bureau, although a divorce decree may allocate debts to a specific spouse, it may not change the fact that a creditor can still collect from anyone whose name is listed as a borrower on the loan or debt. As such, you should be sure to request that the spouse that retains the debt takes the additional step of either requesting your name be removed from the debt or refinance the debt into their own name.
For revolving credit lines such as credit cards, any joint cards should be paid off and closed.
Recommendation # 2. Have a specific plan to be able to pay the debts you are responsible for.
You should understand your payment responsibility and develop a plan for paying loans you will be responsible for before the divorce agreement is finalized. In certain cases, it may be necessary to sell assets to pay off debts that you may have difficulty covering under your new budget.
Recommendation # 3. Work with specialized professionals, such as a divorce mortgage expert as needed.
One of the challenges with divorce is how much it changes the income and financial situation of those that go through it. For example, if you retain the marital home that has an associated mortgage, you will likely need to qualify for the mortgage financing on your own. In these cases, it can be troublesome when working with a bank or mortgage professional that has little experience in dealing with divorce situations.
Consider working with a lending professional that has the knowledge and experience in dealing with similar situations. For example, lending professionals that have the Certified Divorce Lending Professional (CDLP®) certification have specialized training in divorce situations. To find a CDLP® in your area, you can use their online search tool.
Recommendation # 4. If possible, consider paying off debts as part of the separation agreement.
Sometimes the simple path is the best path. As you seek a fresh financial start, it may make sense to simply pay off certain marital debts from marital assets as part of your separation agreement. Once loans are paid off, it becomes much easier to simply close the loans as paid without going through the hassle of refinancing or attempting to remove one spouse’s responsibility in paying the debt.
Navigating debt during a divorce requires a thorough understanding of your state's laws and a meticulous approach to documenting and addressing each financial obligation. Whether you're dealing with credit card balances, mortgages, business debts, or student loans, clarity and proactive planning are essential. By working closely with legal and financial professionals, such as attorneys and Certified Divorce Lending Professionals, you can ensure that your debts are handled fairly and effectively. Implementing the recommendations discussed, from requesting removal from joint debts to developing a solid repayment plan, will empower you to achieve financial stability and move forward with confidence. Ultimately, a well-informed and strategic approach to debt management during divorce can pave the way for a more secure and prosperous future.
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