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Dividing debt during your divorce

Colorado follows the "Equitable Distribution" theory to divide disputed marital property during a divorce. However, debt can be difficult to define and divide fairly during a divorce.

It might be easier to pick and choose who gets the coffee table, the television, even the car during a divorce than who gets the debt. No one wants to pay more than they must in this expensive and emotionally exhausting process. You may need an attorney to fight for what's fair in your divorce.

What will not be your debt?

Pre-marital debt or any non-marital debt belonging exclusively to your spouse before the marriage will most likely be their responsibility once again so long as it is specifically traceable back to that person and hasn't been comingled with marital debt.

If both of you took out loans and opened accounts only in your name it does not guarantee that you will not have to pay some of your spouse's debts. For example, if both of you benefited from the purchase or payment, some of the debt from one person can be owed by both of you, such as:

  • Shelter and Utilities
  • Meals
  • Clothing
  • Insurance
  • Gifts
  • Expenses related to your children

Student loan debt is highly debatable. Some states may argue it is non-marital because the person will benefit from that education long after the divorce is finalized. In other states, a lawyer can argue against this and claim it as a marital debt. In 2016, a Colorado case determined that student loan debt acquired while the spouses were separated (but not yet divorced) was marital debt to the extent living expenses were taken with the loan.

If one party is financially wasteful and spent marital funds that had no legitimate joint use, then you can argue that party should be responsible for that separate debt. In fact, when filing a divorce and even in contemplation of a divorce, keep in mind the Automatic Injunction related to finances:

Restraining both parties from transferring, encumbering, concealing, or in any way disposing of, without the consent of the other party or an order of the court, any marital property, except in the usual course of business or for the necessities of life and requiring each party to notify the other party of any proposed extraordinary expenditures and to account to the court for all extraordinary expenditures made after the injunction is in effect. C.R.S. ยง14-10-107(4)(b)(i)(A).

What could be your debt?

Most debt will be assigned fairly, probably according to a percentage of your income. The court, judge, or another mediator would attempt to keep debt equitable on both sides.

  • If you keep a piece of property (such as a car) you take on any debt remaining that relates to that property
  • If you or your spouse acquires debt while you are separated, you may still be responsible until the moment you are divorced
    • Take action to protect your credit promptly after you separate to avoid unfair charges
  • Attorney fees
  • Anything else the judge, attorneys or the other arbiter deems fair

Be sure to pay only your fair share in the divorce. Protect your assets and follow any rulings ordered by a judge during your divorce settlement.

What about your liabilities when dividing debt?

You may find that you have more liabilities than you originally believed, with these among the most common types:

  • Credit cards
  • Mortgage
  • Car loans
  • Personal loans
  • Home equity loan or home equity line of credit

Some of these debts are easier to deal with than others. For example, if you have joint credit cards, you may be able to pay off the balances with money that you have in a savings or investment account. This allows you to move through divorce without the joint debt hanging over your head.

On the other hand, a mortgage is often more difficult to deal with, as it's attached to an asset that both individuals may covet. If you both want to remain in the family home post-divorce, you could find yourself with no choice but to find common ground and sell the home, see who qualifies to refinance the home, or attempt to keep the kids in the home.

Additionally, it's critical to make a note of what is separate and what is joint debt. This often comes into play if your spouse brought a lot of debt into the marriage, such as credit card debt or student loans. As long as you didn't commingle the debt, such as using a personal loan to consolidate it or continuing to utilize the extended credit and pay it down so that you can no longer trace what portion existed prior to the marriage, you can argue that you shouldn't be responsible for paying any of it in the future. Or, an enforceable premarital agreement may have excluded the debt from division.

As important as it is to fully understand your assets and how they're divided, the same holds true of your liabilities. If you neglect to maintain a firm grasp of your situation, you could end up responsible for debts that you shouldn't have to pay.

An understanding of your situation and knowledge of your legal rights will help you formulate a property and debt division plan that puts you in the best position possible in the future.

What about joint credit card debt?

Naming responsibility for credit card debt is a common sticking point for many divorcing couples. Here are five tips that can help you better deal with this type of debt during divorce:

  1. Discuss paying off the debt: If you and your-soon-to be ex-spouse agree that this is the best strategy, talk about the best ways of eliminating your joint credit card debt. The most common strategy is using money from a joint account to eliminate the debt once and for all.
  2. Use a balance transfer credit card: If you're unable to pay off the debt before your divorce, both individuals can use a balance transfer credit card. This ensures that you and your ex are left with the same amount of debt. You can then manage it how you best see fit.
  3. Cancel all joint credit cards: If you decide to pay off joint credit card debt fully, it's easy to overlook closing your accounts. If you leave one or more active accounts, it allows the other individual to continue using it.
  4. Track your expenses: Review the last three credit card statements and note which expenses are joint, which ones belong to you and which belong to your ex. This is particularly important if the other individual has run up a large amount of debt in the hope of only covering half of it in divorce.
  5. Consider filing for bankruptcy: Bankruptcy does not make sense for every divorcing couple, but it could help if you're facing financial difficulties. Chapter 7, for instance, allows you to eliminate some of your debts, including credit card balances. But, it may be necessary to file for bankruptcy before divorce as some marital debts follow a divorce are not dischargeable or could result in re-opening the division of marital property.

The divorce process is complicated enough without credit card debt getting in the way. When you develop a plan early on, you're able to best deal with debt at the appropriate time.

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