One of the scariest parts of separation and divorce is knowing that everything will be divided – but not being sure exactly how. Literally everything is up in the air, and you don’t know what your finances will look like in the not-so-distant future.
That’s especially true when there’s debt to divide. In some cases, debt is really all there is to divide. Those are definitely the worst. It’s tempting for people in that position to decide that they really don’t need a lawyer (after all, how can they afford it?) but I don’t think the need is any less apparent in these situations.
After all, if you get too large of a share of the debt, that’s a net cost to you, too – just the same as it would be if you lost out on an asset with monetary value.
In most cases, though, there’s a least some debt. There are home equity lines, and credit cards, and car loans and mortgages and about a million different ways to owe people money.
It’s nothing to be embarrassed about. I know that most of our mothers told us that it was rude to talk about money but, in a divorce, we have to be able to have an open and honest conversation about money!
Different debt is handled differently. Let’s talk about it in a little more detail, including what typically happens when different types of debt are divided.
Mortgages, Second Mortgages, and Home Equity Lines
The mortgage on the marital residence is often a biggie – almost everyone has a mortgage! But we don’t really have to DIVIDE that debt.
In the case of the house, there are really only two options: either we sell the house and split the equity (after closing costs, etc), or one party buys out the other party’s interest.
If the house is sold, the purchase price pays off your mortgage, closing costs and other fees, and then you split what’s left over – so the mortgage goes away.
If the house is kept by one or the other of you, you have to refinance the existing mortgage balance PLUS the other party’s half interest in the equity in the home. So, in that case, the person taking the house walks away with the existing mortgage balance plus one half of the equity. (In most cases, this DOES cause the mortgage premium to go up!)
It’s possible that you could buy out your spouse’s interest in the home by taking less of another asset (say, cutting your interest in the retirement by the amount of equity he’d be giving up in the home), so you’d JUST refinance the existing mortgage balance. Your mortgage could still technically go up (it’s always a matter of current interest rates), but you wouldn’t have to refi the mortgage balance PLUS equity. (As always, though, it’s a good idea to talk to a financial professional before making any decisions about what to do with the marital residence or your interest in the retirement.)
Second mortgages and home equity lines are the same – they’re usually satisfied at the time that the mortgage is paid off when the property is sold, or the amount of the debt is reduced from the overall amount of equity divided between the spouses in the case of a refinance. The person taking the home would still keep the debt, but the person getting out from under the mortgage, second mortgage and/or home equity line would receive a reduced equity payout (or maybe none at all).
When a home is underwater, it may be necessary to bring cash to close, or to literally pay the other spouse to keep the home. Talk to an attorney about your options if this is your situation.
The car loans
The car loans are often easy, too! In most cases, we have a loan on each car – husband’s and wife’s.
We don’t have to divide the debt; in those cases, especially where the amounts are relatively equal, the person keeping the car keeps the debt associated with it.
In a case where there’s a value differential – meaning that one of you is taking away a car with a lot of equity in it (not just, oh, hey, he has a Lamborghini worth $100k – if it has $99k in debt, it’s still only actually worth $1,000 to you) and the other is not – we could offset the difference in value by trading some other assets, or making a cash payoff.
If, say, he has a car worth $10k that is paid off – he has an asset worth $10k. If you have a $10k car but you still owe $9000 on it, you have an asset worth $1k. In this example, though the cars themselves may be worth a similar amount, the equity there is different. In fact, it’s $9k different. So, maybe he gives you an extra $4500 from the bank accounts, or he gives you something else worth roughly that amount, to offset the difference. Maybe you just point it out, and use that as a bargaining chip for getting something else that you want – whether it’s worth actual money or just convenience to you.
Credit Cards
Credit cards ARE often divided in a divorce – and it’s often something close to 50/50! We look at those the way we look at other assets and liabilities in the marriage, like the retirement accounts, and divide up the marital share.
That means that, generally speaking, both parties take debt away if they bring debt to the table from during the marriage.
There are some exceptions, though – especially if the money was spent for a non-marital purposes, like to support an addiction or an affair. We will typically look at the money, when and how it was spent, and then allocate it as either marital or separate based on that classification.
That doesn’t mean that just because the purchases benefitted only one spouse (like, to buy clothes or a boat or whatever) that it isn’t a marital purpose, either.
Additionally, whatever is earned, purchased, or acquired AFTER separation is separate property.
Dividing debt is a big deal – as big a deal as dividing assets! You should definitely talk to an attorney about how debt and how it should be divided; don’t just enter into an agreement without double checking.
For more information, or to schedule an appointment to meet with an attorney to discuss allocation of debt in your case, give us a call at 757-425-5200.