Divorce Attorney Scott J. Stadler

    • 01 JUL 14
    How Are Debts Divided In A Divorce?

    How Are Debts Divided In A Divorce?

    It’s not an easy choice, but you have decided to end your marriage. There are so many questions surrounding this decision, such as parenting responsibility and property settlement. One important aspect of a divorce is what happens to the debts that you have accumulated during the course of your marriage.

    Of course, if you and your divorcing spouse can come to an agreement as to how assets and debt is to be split, then absent some abuse or fraud or obvious inequity, the judge will probably consent to your agreement. This is always the best way, but we know from experience that sometimes the parties cannot come to agreement on property division.

    Start at 50/50

    The rule in Florida is that assets and debts will be divided equitably. This does not necessarily mean equally. Judges have fairly wide discretion in determining the property split as long as it is fair. They can look at the assets and debts and decide, for example, that one party keeps the boat (and the payments) and the other keeps the motorhome (and the payments) as long as the split is equitable. Or the judge could order all the assets sold, the debts paid off and the remaining cash split 50/50 between the parties.

    Marital or Non-Marital?

    It is critical to determine whether the debt is marital or non-marital. The general rule is that if the debt was incurred during the time of the marriage, it is a marital debt. This presumption can be rebutted by evidence of a written agreement between the spouses stating the debt was non –marital. Usually any debt incurred prior to the marriage is considered non-marital unless the new spouse specifically assumes the debt, such as becoming liable on a mortgage for a house. Again, the assumption of the debt needs to be in writing for the court to consider a previously non-marital debt now a marital one.

    Here is a striking example of how a court looks at marital vs. non-marital debt. Husband and wife were on the verge of divorce, but not yet legally separated, and their daughter was going off to college. Four days after husband put $13,500 on their credit card for daughter’s college expenses, wife filed for divorce. Wife then sought to not be responsible for that debt, as she testified she had no intention of paying for daughter’s college. The trial court bought the story that the charge was an attempt on the husband’s part to force her into assuming a debt she did not intend to incur.

    The appellate court saw things differently, however, and overturned the lower court ruling that the husband should have sole responsibility for that particular debt. The court stated that the rule for determining marital vs. non-marital debt was very straightforward – absent a written agreement or special circumstances, debt incurred during the course of the marriage is marital debt. The end of the marriage for the purpose of determining this is the date of filing, so the fact that wife filed her petition for divorce 4 days after the credit card charge makes it clear – this was a marital debt.

    Pre-marital debt stays with the original party

    This rule is very straightforward – if you incurred the debt before the marriage, it is all yours. The exceptions (and complications) come when the spouse assumes some of that debt. This most frequently happens with houses, as often the newly married couple will refinance a home that was owned solely by one party, assuming a new mortgage in both their names.

    In these cases the judge will look to the value of the asset prior to marriage, the value now, the approximate contribution the spouse has made to payment of the debt or increase in value, and rule accordingly. It is critical in these situations to have an accurate valuation of the property in question. Good record keeping in terms of who paid what is also valuable, but that is not always easy to come by, especially in the hindsight of impending divorce.

    Student Loans

    Some states treat the education that comes with a student loan as an asset to be divided in a divorce, but Florida treats the debt of a student loan like any other debt. The main question is when was the loan taken out, prior to marriage or after marriage?

    This, too, can get a little complicated when some part of the loan is taken out before marriage, then the loan is added onto during marriage. It is generally determined that only that part of the debt incurred during marriage is marital debt. If the loans have been consolidated, then it gets a bit messy. This scenario is a good candidate for a set-off by the judge – as long as it is a fair distribution, it is acceptable.

    Waste or Fraud

    We sometimes hear stories of a husband or wife going on a spending spree just prior to filing for divorce, or emptying a bank account so the other party does not have access to the funds. It is an understatement to say the courts really, really frown on these types of activities. You are not allowed to waste marital assets, or hide them from your spouse. If you choose to rack up large credit cards bills just before the petition is filed, you may find yourself with all of the debt from that spending spree. Note that in the example we discussed before, the husband’s charging of daughter’s college expenses were considered a valid marital debt, not waste of marital assets. It would be a different story if he were incurring debt for his own benefit, not that of the family.

    You also cannot defraud the marital estate. There was one case (in another state) where the husband was trying to inflate the amount of marital debt that existed so as to reduce the amount of spousal support he was going to pay. He got a business colleague to draw up some phony loan papers, then he offered to assume the fake debt in exchange for paying much lower spousal support. The wife’s attorney got wind of the situation, presented it to the court and the husband not only had to pay the wife spousal support, he was awarded more than the usual 50/50 division of debt as punishment for trying to defraud the marital estate. That plan certainly backfired on him, as it should have.

    One Last Note

    Sometimes people mistakenly believe that if the debt is in their name only, it is not marital debt. For instance, if property is only titled in one spouse, or if only one name appears on a credit card account, some think only that named person is responsible for the debt. The courts have long ago settled this according to the hard and fast rule: if the debt was incurred during the course of the marriage, it is marital debt. People are often surprised during a divorce when credit card or other consumer debt appears that they had no idea about because it was solely in the other spouse’s name. If it appears that this secret debt was an attempt to waste or defraud the marital estate, the court will sometimes assign that debt to the one incurring it, but not always.

    The division of property and debt during a divorce can be very complex. It is best if the parties can work out an equitable arrangement that the judge will approve, but it isn’t always possible. In either case, you need the services of an experienced and dedicated family law attorney to help you navigate these waters and ensure that the division is fair and equitable.