When preparing for divorce, many couples focus so much on divvying up assets and getting custody of the children that they forget they’re also responsible for the relationship’s debts. Many have the false perception that if the debts were caused by one party in the relationship and were in that party’s name, the other party isn’t responsible.
Unfortunately, debt isn’t as cut-and-dried as that in the court of law.
You may be on the hook for your spouse’s debts, even if those debts are all in your spouse’s name.
Let’s delve deeper into this complicated matter.
Equitable Distribution vs. 50/50 Community Property
Depending on the state you live in, you will likely be subject to two types of laws in a divorce: an equitable distribution state or a 50/50 community property state. About 41 states follow the equitable distribution principle when dividing property and debts.
This means courts divide a couple’s property and debts based on fairness. This may not always be a 50/50 split. It will be based on a ratio that a judge believes achieves a fair balance.
Only nine states follow the 50/50 community property principle. By default, all assets and debts acquired by either spouse are considered jointly owned, regardless of whose name is exclusively on the account.
Divorcing couples in Michigan are subject to the equitable distribution principle. In such a divorce, the judge separates the debts into two separate categories.
Separate, Non-Marital Debt
The judge treats these debts as belonging exclusively to one party in the marriage. For instance, if one party has student loans prior to the marriage, those loans remain exclusively their responsibility after the divorce.
Marital Debt
These debts are shared debts incurred by either spouse for the household’s benefit. This could include car loans, credit cards, or medical bills. Michigan defines marital debt as funds to support family life, home improvements, or daily life expenses.
The Exception to Equitable Distribution
Although marital debt is typically shared, an exception applies when it is not shared equitably, particularly when one spouse is reckless with spending. In Michigan, if one partner accumulates substantial debt through what is known as wasteful dissipation, that partner is responsible for the debt. This type of spending is considered not to benefit the marriage. This includes the following:
● Gambling expenses or other speculative schemes.
● Debts related to extramarital affairs.
● Substance abuse.
● Secret frivolous spending or luxury splurging.
Third-Party Creditor Trap
From the vantage point of Michigan courts, you may be off the hook for your spouse’s careless spending habits. A judge can assign legal responsibility for a joint debt to one spouse, but the creditor or lender isn’t bound by that ruling.
For example, if you and your spouse have joint car loans or credit cards together but only one of you is found legally responsible for the debt, the other party isn’t off the hook. Your partner’s failure to pay on time or pay at all could fall on you. As a result, creditors can pursue you and damage your credit for your spouse’s failure to pay.
To minimize this obligation, the divorce decree can liquidate assets to pay off these debts or allow time for the responsible party to refinance the debt in their name only.
Tips for Protecting Your Financial Standing After Divorce
To minimize the impact of debt in a divorce, you shouldn’t rely exclusively on a judge. Here are some things you can proactively do to ensure that your spouse’s debts don’t become yours after a divorce.
● Pull comprehensive credit reports to identify every open account tied to your Social Security number.
● Close or freeze joint lines of credit, including credit cards and home equity lines of credit (HELOC), to prevent the estranged partner from running up balances.
● Gather detailed bank records, tax returns, and monthly statements going back several years.
Talk to a Michigan Divorce Attorney About Marital Debt
Debt can be one of the most complicated parts of a divorce, especially when joint accounts, credit cards, loans, or questionable spending are involved.
At Rappleye & Rappleye P.C. in Jackson, we help clients understand how Michigan divorce law applies to marital debt, property division, and other financial concerns that can affect their future. If you are preparing for divorce or are concerned about debts accumulated by your spouse, contact our divorce and family law firm today to schedule a free consultation.