Sorting Out Debt Division In Divorce

Debt Division In Divorce
Karen Sparks

By Karen Sparks | Oct 30th, 2019

One of the challenging issues in the journey of marital finances in divorce is who is responsible for the payment of accrued debt obligations. 

Often getting to the bottom line can run the full spectrum of discussion beginning with how the couple approached the management of day to day finances to post-separation costs and expenses. 

Rather than spending time turning this into an emotional battle of accusation and/or excessive spending to adversely affect the other party, consider switching your perspective with the following tools. 

1. Financial Intel

Pull the credit reports, gather all available physical and digital records and take a moment to figure out where you actually stand for bills and related expenses. You can’t negotiate a solution without having real factual data. 

Some jurisdictions have court forms that help jump start this process by having you detail your income and assets. 

2. Supporting Documents

Identify any and all recent statements for accounts and records including but not limited to, mortgages, vehicle loans, credit cards, bank loans, business credit lines, tax statements, student loans, medical and legal bills, loans to family and third parties, loans taken out against 401K plans, margin fees for investment trades etc. 

It is also helpful to gather income records for both parties including W2, K-1, 1099, business profit and loss statements, distributions from trusts etc. in order to establish how to strategize the debt allocation. 

3. Assigning Debt To The Proper Category

It is helpful to sort out the right bucket for specific debts. Create a system that is tailored to your own situation and don’t forget to include the following basic groupings: 

Secured debt is normally attached to assets which were used as collateral such as homes, cars, boats etc. The allocation issues for secured debt can include selling the asset, buying out the equity of the other spouse in the asset, continuing to jointly own the asset or trading equity for another asset. If there is a disparity regarding auto values they can be equalized with liquid assets or traded for assets of similar value. 

Unsecured debt generally involves credit cards and/or similar products for most families. It will be necessary to make sure the steps in section 1 and 2 above have been initiated to determine the relative payment responsibilities. Some common facts involve credit cards in one spouse’s name potentially being assigned to that spouse (unless there is a large income disparity with a low- or no-income earning spouse), splitting joint held credit card debt, handling costs on joint credit cards that were incurred after date of separation etc. Settlement options could include trading the amount of debt for another marital asset of the same or similar value. 

Tax Debt. If there are issues of current joint federal and/or state tax debt owed and/or extensions that have been granted to address past tax debt, these amounts need to be verified by contacting the appropriate taxing authority. Additionally, if you feel that liability for tax debt was due to circumstances that you were not aware of involving your spouse, then you might want to refer to the federal IRS guidelines for Innocent Spouse relief. 

Divorce expenses. An often-overlooked category is expenses related to the divorce proceedings. These can be high or low costs depending on how extensive and contentious the parties are during this time. It is prudent to first take stock of exactly what professionals you really need and what tasks are necessary. A good first step would be to meet with a certified divorce financial analyst preliminarily to help you sort out the financial valuations, projections, and options so that you have a clearer picture of how you need to move forward with any divorce professionals that you engage for services.

The key to unpacking the debt allocation piece in divorce negotiations is to remember that it involves detail, documentation and due diligence. 

Karen Sparks

Karen Sparks

Karen D. Sparks, CDFA®, J.D. is the principal and owner of Divorce Financial Strategists™. She provides clients with focused divorce analysis and strategies for marital assets.


©2011-2024 Worthy, Inc. All rights reserved.
Worthy, Inc. operates from 25 West 45th St., 2nd Floor, New York, NY 10036