Debt consolidation refers to rolling multiple debts into one single account, ideally with a lower interest rate or monthly payment than the original debts taken collectively. If parties to a divorce had significant debt before, the problem can only grow in divorce, thanks to attorney fees, child support and the addition of a new set of living expenses. But debt consolidation is not always possible for every party.
Marital Debt Division
All states divide marital debt under either community property or equitable distribution (ED) laws. In community property states, courts seek to divide the total estate equally. In ED states, the focus is on dividing the estate equitably, or fairly; as fair and equitable aren't always synonymous, ED laws contain a list of factors justifying an unequal distribution in certain cases. Both types of states hold that debt acquired by either party during a marriage is marital and therefore divisible in divorce no matter whose name is on it.
Distribution of Debt
Courts typically prefer to make an in-kind distribution of marital property and debt. This means that wherever possible, a judge will try to satisfy a desired division by giving each party debt and property items intact. With respect to debt, a court will seek to distribute debt in each party's name to that party wherever possible. The division is based upon the net value of an estate, which requires subtracting the total debt from the total value of all assets taken together. As such, a party can appear to "get everything" in a divorce in terms of property but actually walk away with less value than the other side if he is also saddled with everything in terms of debt.
Debt Management Options
Debt payments can become unmanageable in light of child support payments, attorney fees and spousal support. To reduce or eliminate a debt load, some parties choose to extinguish as much marital debt as possible out of a sale of the former marital residence or through the sale or liquidation of other marital assets. Although courts are empowered to order parties to share in each other's debt, some parties may prefer to extinguish as many bills as possible to reduce the risk that the other side will file bankruptcy and leave them with all the responsibility for joint debt. In other cases, parties may pay off debt in a refinance of real property or through debt consolidation loans taken through banks, finance companies or credit cards.
Bankruptcy
Debt consolidation is sometimes impossible in a divorce, as parties' credit ratings can plunge so low that even the low-end credit market won't touch them. In some cases, the only realistic debt management option is to file for bankruptcy protection under Chapter 7 or 13 of the United States Bankruptcy Code. Both forms of bankruptcy allow debtors to keep assets like homes and cars if they can continue to make the payments. After discharge, the bankrupt party receives a fresh start--albeit with a substantially lower credit score.
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