How to Handle Debt in a Divorce

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Survey after survey shows that disagreements over money is one of the two main reasons married couples fight (the other is sex). If the couple had differing philosophies about saving and spending during the marriage, odds are they fight over dividing their debts during a divorce. Divorce will be complicated and the couple would benefit greatly from the help of a financial advisor to shepherd them through it.

Financial advisors can provide financial planning before, during and after the divorce. Plus, they can make splitting spouses aware of their options, the value of their assets, and how their financial decisions will impact their future.

As an attorney specializing in family law, many of my clients are professionals, entrepreneurs, executives or the spouses of high earners, all of whom ask for help in solving challenging legal and financial puzzles. I’ve also worked with divorcing couples to address the allocation of marital wealth that arises, including the division of assets.

State laws deal with debt at the time of divorce in different ways. Most states differentiate between debt acquired before, during and after the marriage dissolves. Some states, such as California, treat debt accrued during marriage as marital or community property that must be divided in the divorce. This typically results in an equal division of debt.

Nine states including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community-property states, which means that each spouse holds an equal, undivided one-half interest in all the property acquired during the marriage, unless an exception applies, and that each spouse will receive one half of the community property in the divorce. If one spouse owned property before getting married, and it still exists as of the date of separation, it is deemed separate property. The court may not divide that property. The couple may have acquired an interest in a separate property, however, and this interest must be divided in the divorce. If a spouse owned the property prior to getting married but it sold during marriage, they may be able to assert a separate property interest in various community-property items. For instance, if one spouse sold a house they owned before marriage and used the proceeds to place a deposit on a house purchased after marriage, they might be entitled to a credit for that separate-property contribution. The division of property is often difficult because it can be emotionally charged. But like all aspects of divorce, this should be taken one step at a time. By starting with the items most easily divided, the separating couple can avoid paying lawyers to litigate the value of what may be invaluable items.