Debt division in divorce can be a tough job, made all the more difficult by child support, spousal support and the addition of a new set of living expenses. Although parties may perceive that their negotiations regarding debt division amount to "fighting over nothing," equalizing the marital debt load between both parties is an important part of the case.
Types of Property and Debt Division Systems
States divide marital property and marital debt under laws of either community property or equitable distribution. Community property courts seek to divide an estate -- the aggregate of debt and property -- equally, whereas equitable distribution courts seek to divide it equitably, or fairly. Equal and fair are not always the same thing, and so equitable distribution laws come with a list of "distributional factors" justifying an unequal distribution in favor of one party in certain cases. As such, a court might not engage in a process of debt "equalization" if the distribution of the estate won't be equal.
Marital vs. Separate Debt
The definition that a given state applies to marital property will also apply to marital debt. In general, marital debt consists of all debt acquired by either party after date of marriage and before either date of separation or another date set forth in state law. A court will not divide a party's separate debt and make the other side directly or indirectly responsible for it in a property division proceeding. While the existence of separate debt can be a distributional factor in equitable distribution states, the focus of debt allocation will be on marital debts, not separate debts. Parties sometimes engage in significant litigation over whether or not a given debt is marital.
Balancing Debts
All debts are not created equal, and they do not become so just because a court is distributing them pursuant to a divorce. Unless the parties have sufficient resources to immediately pay off a debt in full, the interest rate on a debt is an important factor to consider in debt distribution. If one party is distributed a $5,000 personal loan at 11% and the other receives a $5,000 credit card account at 24%, the party receiving the credit card will end up repaying more than the party responsible for the personal loan. Parties should remember the effect of interest rates when negotiating a debt settlement or arguing in court.
Bankruptcy
Parties to a divorce should not ignore the operation of bankruptcy laws in dividing marital debt. If the parties' estate is one of all debt and no assets, they may wish to consider filing a joint bankruptcy. If a party does not wish to consider a joint bankruptcy, she should nevertheless consider the possibility that the other party might go ahead and file one one his own. If this happens, he may succeed in obtaining a discharge of most or all of the debts that she seeks to divide in court. The nonbankrupt party will then be solely responsible to the parties' joint creditors.
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