Debt And Marriage: When Do I Owe My Spouse’s Debts?
Whether you and your spouse are responsible for paying each other’s debts will depend primarily on where you live. If your state follows common law property rules, spouses are only liable for their own debts, with a few exceptions. For instance, both spouses must pay debts for family necessities like food, shelter, or tuition for the kids, although how states treat joint and separate debts varies slightly, so you’ll want to check your state laws.
However, if you live in one of a few states with “community property” rules, both you and your spouse will owe most debts incurred by either one of you during the marriage.
Keep reading to learn more about:
• when you owe your spouse’s debts, and
• how community property laws will affect you and your spouse in bankruptcy.
If you plan to file for bankruptcy in Utah or another community property state, you’ll want to know about the “limited community property discharge” that arises when only one spouse files for bankruptcy. Although all community property will be safe from creditor collection, the nonfiling spouse’s separate property will remain at risk.
When Are You Responsible for Your Spouse’s Debt?
In community property states, most debts incurred by either spouse during the marriage are owed by the “community” (the couple), even if only one spouse signed the paperwork for a debt. The key here is during the marriage. So if you incur a debt, such as a credit card balance, while you’re single and then get married, it won’t automatically become a joint debt. However, an exception can occur when a spouse signs on to an account as a joint account holder after getting married. Some states, like Utah, have a more nuanced way of analyzing who owes what debts by evaluating who incurred the debt, for what purpose, and when.
After a legal separation or divorce, only the spouse who incurred the debt owes it unless the debt was incurred for family necessities, to maintain jointly owned assets (for example, to fix a leaking roof), or if the spouses keep a joint account.
How Are Income and Property Shared Between Spouses?
In community property states, couples share income, as well. All income earned by either spouse during marriage and property bought with that income is community property, owned equally by husband and wife. Gifts and inheritances received by one spouse and separate property owned before marriage that remains separate are the respective property of one spouse alone. Comingling a gift or inheritance, such as by adding it to a joint bank account, could erase the protection. All income or property acquired before or after a divorce or permanent separation is also separate.
What Property Can Be Taken to Pay Debts?
In a community property state, creditors of one spouse can go after the assets and income of the married couple to make good on joint debts, and remember, most debts incurred during marriage are joint debts. Creditors can go after joint assets in a community property state no matter whose name is on the asset’s title document. For example, a business owner’s name might not be on the title to her spouse’s boat. Still, in most community property states, that won’t stop a creditor from suing in court to take the boat to pay off the business owner’s debts assuming the boat was purchased with community funds and not separate funds.
Community property collection rules also apply to a spouse’s separate debt, such as one spouse’s child support obligation from a prior relationship, or a debt in one spouse’s name only where the spouse hid the marriage. In that case, a creditor can go after only that spouse’s half of the community property to repay the debt.
How to Remove a Spouse’s Liability
Couples in community property states can sign an agreement with each other to have their debts and income treated separately. Signing a pre or postnuptial agreement like this can make sense for a couple before one spouse goes into business. But if you’re already in business, signing an agreement now won’t protect your spouse from liability for business debts that you already owe, only from liability for future business debts.
Keep in mind that this agreement will be between you and your spouse. It likely won’t affect whether a creditor can pursue you for debt, only your ability to pursue your spouse’s personal assets for payment. Check with your family law lawyer or bankruptcy lawyer for clarification.
You can also sign an agreement with a particular store, lender, or supplier, stating that the creditor will look solely to your separate property for repayment of any debt, essentially removing your spouse’s liability for any obligation or debt from the contract—if you can get the other party to agree.
How Does Bankruptcy Work in Marriage?
If only one spouse files for Chapter 7 bankruptcy in a community property state, creditors can collect community debts against the nonfiling spouse. However, the creditor can’t forcibly take community assets to pay community debt discharged in the filing spouse’s bankruptcy. The creditor can only collect against the nonfiling spouse’s separate property.
This protection is known as a “limited community property discharge.” Also, if you’re considering divorce, talk with Ascent Lawfirm lawyer about the effect the divorce will have on your limited community discharge. You could likely lose its protection.
Am I Liable for My Spouse’s Credit Card Debt?
Under some circumstances, you can be held liable for your spouse’s credit card debt. Whether you might be responsible for this debt depends on:
• where you live
• whether it’s a joint credit card
• whether you’re a cosigner, and
• whether the debt was assigned to you in a divorce proceeding.
Credit Cards That Are In Your Name Only
In common law states, you’re usually only liable for credit card debt if the obligation is in your name. So, if the credit card is only in your spouse’s name, you’re typically not liable for that debt. But keep in mind that if you have jointly owned assets, then the credit card company can still go after your spouse’s interest in that property.
Credit Cards That Are In Both Spouses’ Names
If the debt is for a joint credit card in both your names, then you and your spouse are equally liable for it.
Credit Card Cosigners
Also, if you’re a cosigner on your spouse’s credit card, even if it’s not a joint account, you’re still on the hook.
Additional Rules for Community Property States
Certain states called community property states follow community property rules instead of the common law when determining which spouse is liable for a particular debt. In community property states, as in common law states, you’re on the hook for any debts in your name or that you cosign for. But in addition, debts incurred by you or your spouse during your marriage, regardless of whose name is on it, are generally deemed to be community debts, and both spouses are considered equally liable. So, even if the credit card debt was incurred by your spouse alone, you might be liable for it. However, keep in mind that debts incurred by your spouse prior to marriage or after separation or divorce are not community debts.
Each state weighs different factors and might have additional rules regarding when an obligation is considered a community debt. Usually, if the debt was incurred for something that benefited your marriage, it will likely be deemed a community debt. But if it was a purchase that only benefited your spouse, there is a greater likelihood that it will not be considered a community debt.
Even if you weren’t otherwise liable for a credit card debt, a judge may still assign the obligation to you in a divorce proceeding. If a credit card debt is assigned to you in a divorce, that doesn’t mean you are contractually liable for it to the credit card company because a family court judge can’t change the terms of the initial credit card contract. But if you fail to pay the debt and the credit card company comes after your ex-spouse, then your ex-spouse can sue you for violating the divorce decree and seek reimbursement for any damages suffered.
What Happens To Debt After A Divorce?
If you accumulated a lot of debt during your marriage, it’s important to understand what happens to debt when you get divorced. You may not be responsible for things you think you are, and you may owe on debt you were sure your spouse should cover. Ultimately, a lot of the legal responsibility will come down to whose signature is on a loan paper and whose name the loan is under.
Legal Liability for Debt
Is one spouse responsible for the debts of the other? Well, it depends. If you signed on a loan as the borrower or if you cosigned a loan for your spouse, you are legally liable for the debt that accompanies it. Any late fees charged due to a spouse’s delinquent payments will also legally be your responsibility — even if they tell you that they’ll take care of it. If your name is on the loan, you owe the money. It’s that simple.
Let’s say you took out a loan for your partner with the agreement that they would pay it. You may both agree that the person who said they’d pay the loan is the one who owes on it after the divorce, but that agreement may not hold up in court if you’re the sole borrower. Debts owed to insurance companies follow a similar protocol. If your name is on the loan as a borrower or co-signer, you owe it.
How to separate assets
An important step in safeguarding your finances is to separate your assets, but doing this isn’t always as easy as it sounds.
A prenuptial agreement or a “prenup” for short is an agreement in which both parties state that they are only entitled to the assets they brought into the relationship in the event of a divorce. In other words, they do not split assets when the marriage ends. The same asset stipulation can be made by signing a post-marital agreement, but spouses agree to this kind of contract after getting married. While both of these agreements are useful in keeping assets separate, they may not protect you from shared debt that was accumulated while you were married.
You can also secure your finances by investing your money in protected accounts. If the question: “Am I responsible for my husband’s debts if we divorce” haunts you, you might want to sock money away in retirement plans, trusts, corporations or annuities where your money is likely to be safe from the other party. While doing this may help safeguard your assets, it’s still wise to consult a trusted financial advisor before committing to such a plan.
How You Protect Your Money During Divorce
If you’re worried that one spouse is responsible for the debts of the other during a divorce, you should find a way to protect your money during the divorce process. Couples often create joint debt while married, and the “what’s mine is yours” mantra can backfire if they decide to divorce.
If you want to protect your finances during your divorce, it would be wise to stop using joint credit cards so that it’s clear who the debt belongs to. If possible, you should close down joint accounts entirely.
Try to get your name taken off of any joint credit cards or remove yourself as an account cosigner. This can be difficult, though, because some credit institutions prefer to have two sources of income attached to an account. In such cases, make sure to keep track of spending activity so that you can demonstrate who is responsible for the debt.
If possible, try to pay down as much community debt as possible before entering into divorce proceedings. Though this may seem unfair, practicing sound divorce debt consolidation before moving forward with the actual divorce can make it easier to determine which party is responsible for the debt.
Will divorce impact your credit score?
Your credit score is impacted by your financial habits, such as paying off personal debts and the amount of disposable income to credit debt, and the actions taken jointly during your marriage can affect your score as well. If you take out a joint loan on a home or open a credit account together, you are liable for any financial delinquency on that debt. If your spouse was supposed to pay off debt and forgot to do so, the penalty from the late payment will affect both of your credit scores.
Try to remove yourself from joint accounts to protect your credit score from irresponsible actions by your former partner. Make sure that any outstanding debts get paid off as well. It can be tricky to get your name off of credit that you signed for with another party, but you can try to refinance your existing loan to make just one person responsible for it. That may not work in every case, but it’s worth a try.
