Divorce has become a common occurrence. According to the Centers for Disease Control and Prevention, there were 827,261 divorces in the U.S. in 2016.
Going through a divorce is an emotionally devastating experience, but financial worries can make it worse, especially if you have credit card debt or outstanding personal loans. Find out what happens to personal loan liability in a divorce and what you can do to protect yourself.
Determining personal loan liability in a divorce
When it comes to debt, the answers to these three questions can help determine who is liable for repayment of outstanding balances.
1. When did you take out the debt?
In most cases, you share responsibility only for debt that was incurred after you got married. If you took out a personal loan before your wedding, your spouse is not liable for that debt.
However, the treatment of debt taken out during your marriage can be more complicated.
2. Do you live in a community property or equitable distribution state?
According to Bruce McClary, the vice president of communications for the National Foundation for Credit Counseling, your debt liability depends on which state you live and whether it follows equitable distribution or community property rules.
In an equitable distribution state, the law considers any property, assets, or debt acquired during the marriage as belonging to the person who earned or incurred it. When a couple divorces, the property and debt are divided between the spouses. A court will review the case and do the split in a fair and equitable manner, taking into account the salaries of each spouse, who was responsible for child care, and the earning potential of each person.
“In most states, the debt you incurred in your own name while married is not the responsibility of your spouse,” said McClary. “But there are some states that have ‘community property’ rules that could leave a spouse responsible for repayment of those debts. It’s good to know where you stand in terms of where you live.”
Most states are equitable distribution states. However, if you live in a community property state, debt in the case of a divorce is handled very differently. Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states.
In these states, debt and assets acquired during a marriage are shared equally between the spouses. Unpaid balances on credit cards and personal loans are split evenly during a divorce.
3. Does the loan agreement differ from the divorce agreement?
During your divorce proceedings, you, your spouse, and your attorneys will work together to create a divorce agreement, which outlines who gets specific assets and who is responsible for debt payments.
That deal is an important tool during your divorce, and it’s different from your loan agreement. Getting in writing via a divorce agreement that your spouse is responsible for the debt isn’t enough to fend off lenders. In some cases, you still could end up being liable for your personal loans or other debt.
“Disputes about repayment of joint loans and credit card accounts are common issues people face after they go through a divorce,” said McClary. “The original credit card or loan agreement is what creditors use to determine who is responsible for repaying the balance owed. Other arrangements, even those that result from the divorce proceedings, may not be recognized by the lenders if they are counter to what was established when the account was opened or last modified.”
Lenders aren’t bound by divorce agreements. If you used your name to apply for a personal loan as the primary borrower or as a cosigner, you still are responsible for the debt.
“If your ex-partner fails to pay an account that you owe jointly, it can inflict damage on your credit rating and lead to the creditor pursuing you for the delinquent balance,” said McClary.
You can take your former spouse to court to enforce the divorce agreement in the case of your personal loan liability. However, doing so takes time and money. Plus, if your ex can’t afford the payments, there’s no way to force them to pay even if the court rules in your favor.
Ways to protect yourself
You still might be responsible for a personal loan in the case of a divorce, so it’s important to take some measures to protect yourself. Here are three ways to end your debt liability.
1. Get removed from the loan
In some cases, lenders might be willing to remove you from the loan if you show them a copy of your divorce agreement. Not all lenders will agree to this request, but it’s worth asking them.
“It’s not always easy to remove your name from a joint account,” said McClary. “Calling the lender and asking to have your name removed is certainly an option you can consider, and it’s possible that they might comply with your request if your partner has enough income to qualify by themselves for the account.”
2. Refinance your debt
If the lender won’t remove your name from the loan agreement, another option to try is to refinance the debt. With this option, the person responsible for the debt in the divorce agreement takes out a new personal loan solely in their name and uses the amount to pay off the old debt. After that, the new debt is only in their name.
3. Sell assets to pay off debt
To get rid of debt, it might be worth selling any assets you have to pay off outstanding loan balances. For example, if you have a car loan, it can make sense to sell your vehicle to repay the loan. That way, you don’t have to worry about missed payments, and you can start moving forward.
Getting through a divorce
Going through divorce proceedings is difficult enough, and splitting up debt can add an extra layer of stress. Now that you know what happens to personal loan liability in a divorce, you can come up with a plan to manage your debt and protect your credit history.
If you have student loans or credit card balances, check out our ultimate guide to divorce and debt for tips on how to pay it off responsibly.
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