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Division of Debt in Divorce Settlements

On Behalf of | Jun 19, 2021 | Divorce

One of the biggest sources of contention during divorce is the division of assets. People spend decades of their lives building wealth and buying things that they enjoy, and no one wants to give up all their stuff because they are splitting up. So parties to divorce typically spend time arguing over who gets the house, the furniture, the vacation home, the artwork, and so on. But as the parties go back and forth over their accumulated assets, many people tend to forget about the marital debt. In a divorce, assets are subject to equitable distribution. This basically means that assets are not split down the middle, with each partner getting exactly half of the combined assets. Instead, the court divides marital assets in a way that is fair to both parties but not necessarily equal. A judge takes many factors into consideration when determining what is fair.

In Tennessee divorce, debt is distributed between the parties in much the same way as assets. Judges do not simply split marital debt down the middle. Instead, a judge takes many factors into consideration to ensure that debt is fairly, if not equally, distributed.

First, Some Basics

To Agree, or Not to Agree

During a divorce, couples can work together amicably and reach agreements on their own without the intervention of a judge. This typically works out the best for everyone involved because the couple knows one another and their situation far better than a judge ever could. They can make fair and equitable decisions on who gets what asset and who pays which bills by mutual consent, as opposed to having an adversarial hearing in front of a judge.

Marital vs. Non-Marital Debt

The first thing that the parties or a judge must do when addressing a divorcing couple’s debt-related obligations is to determine which debts are properly classified as marital and which are non-marital. Non-marital debt is essentially any debt that was incurred by either party before the marriage or since the separation. So it logically follows that marital debt is debt that was incurred during the course of the marriage. However, there are some exceptions to these basic classifications.

For instance, suppose that Sally and John separated and are working on finalizing their divorce. Further, suppose that they are splitting up amicably and are working through dividing up their assets and debts by agreement. As they go through their debts, they realize that two years ago Sally took out an $8,000 loan. The loan was for a month-long Tibetian spiritual retreat. John had no interest in this endeavor and did not go on the trip with Sally. The couple could decide that Sally assumed this debt solely for her own benefit. They could then decide that she is solely responsible for paying back that loan.

How Courts Decide

At the outset of a case, the court typically assumes that a couple shares their debts equally between them. That is the “jumping off” point, as some would say. However, judges take a closer look at each debt individually before making a final ruling on repayment obligations. During that closer look, they consider several factors before assigning responsibility for each individual debt.

Debt Purpose

One of the factors the judge examines is the debt’s purpose. If a party accepted a debt for any purpose related to the support and maintenance of the family—the judge will likely find that is a marital debt. This is true even if that debt is solely in the name of one spouse. And as a marital debt, a court will likely divide that debt more evenly between the spouses—subject to additional factors listed below.

Who Benefitted

Another aspect a judge will examine is who benefitted from incurring the debt. In our example above with Sally and John, only Sally benefited from the Tibetian retreat. One could make the argument that the retreat made Sally calmer and easier to live with, thereby benefiting everyone in the family including John. After considering all relevant factors and hearing all arguments, a judge would make the call.

Joint or Single

A court will also consider whether the one spouse or both together incurred the debt.

Ability to Pay

The court always considers the financial positions of the parties when distributing assets and debts. The goal is to be fair but also to assign obligations according to each person’s ability to make payments.

Asset Attachment

If a debt is attached to an asset, this affects distribution. For instance, if Sally bought a boat by taking out a loan, a judge will equitably distribute the boat (asset) and the debt (loan). Oftentimes, the judge will give both the asset and the debt to the same spouse because that is the most equitable division.

Other Factors

The court is allowed to take additional factors into consideration as the case may warrant. For instance, if John defrauded Sally by going into debt gambling without telling her, a judge will likely require John to pay that debt.

Obligation to Creditors

Although the court can assign debts to each spouse, it cannot modify the contracts you have with your creditors. If your spouse defaults on debts the court ordered them to pay, it can affect your credit, and the creditors may still be able to seek compensation from you. Your divorce lawyer can help you understand any continuing obligations you might have and your options for enforcing the court’s orders against your ex-spouse if they default.

We Can Help

If you are divorcing or contemplating a divorce, you likely have assets and debts that need to be divided. Even if you and your soon-to-be ex are working things out amicably, you need professional guidance to ensure that your decisions are legally justified. If you don’t follow the law, your agreement will likely be thrown out and the judge will then start from square one and make these important decisions for you. The experienced divorce attorneys at Batson Nolan PLC understand what you are going through. We can help guide you through the labyrinth of laws surrounding divorce so that you can reach a fair marital settlement agreement. And if you cannot reach an agreement, we can help make certain that your rights are protected in court. So call us today or contact us online to set up your initial consultation in our Clarksville or Springfield office.