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Debt and Divorce: Who Owes What?

Consumer debt in the United States today is a big issue. The number is actually staggering — total U.S. consumer debt, as of December 2011 is $2.5 trillion (Source: Federal Reserve's G.19 report on consumer credit, released February 2012). Average credit card debt per household with credit card debt is $15,956. Almost all American families in today's economy are carrying some form of debt, so when couples decide to divorce, debt can be a major issue (if it hasn't affected the marriage already!)

When it comes to debt and divorce, there are basically two forms of debt that the courts typically look at: living expenses and community property.

Living expenses are pretty self-explainable - mortgage or rent, groceries, utilities, your cable or cell phone, and other, similar expenses that are regularly occurring, day-to-day expenses. Community property pretty much encompasses everything else. For example, if you're using a credit card to pay for groceries, gas and cable, that debt is considering living expenses. However, if you and your spouse used a credit card to pay for a new television, or perhaps new appliances, that is considered community property.

In California, and other community property states, the courts see the debt that's accrued over the course of the marriage as the responsibility of both parties. So if you and your spouse bought a boat for $25,000, and you still owe $20,000 on it, then both parties split that $20,000 debt evenly.

But what if the husband secretly bought that boat with a credit card that was in his name only and the wife, whose name wasn't on the card, had no idea that her husband bought a boat? Unfortunately for the uniformed spouse, in a community property state she still owes $10,000.

It's also important to note that in a community property state, before a divorce is final, the debt that your spouse incurs during that timeframe is still yours. If you're stuck with an ex-spouse's debt that's crippling your life, and you don't feel you have any other options, bankruptcy may be a path for you. We are not recommending that, and it's definitely not an appealing option, but it does make it possible to "divorce" your spouses's debt, since bankruptcy discharges most of what you owe.

Most financial experts will tell you that if you're going to have to declare bankruptcy, it's better to do it jointly, before you end the marriage, simply because if you're trying to make a clean break, it's much harder to do so if you're carrying a large amount of debt that you accumulated during your marriage.

Finally, keep in mind that if your spouse declares bankruptcy and you don't, you'll still be on the hook for all the debt you two accumulated during the marriage. Creditors unfortunately don't care which partner racked up the debt or whether the other spouse knew about it, they just want to be paid back.

(Source: Divorce and Debt, What You Owe and What You Don't)

Disclaimer – The materials contained in this blog have been prepared for informational purposes only. The information contained is general in nature, and may not apply to particular factual or legal circumstances. In any event, the materials do not constitute legal advice or opinions and should not be relied up on as such.

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