Dividing Debt in Divorce

In some ways dividing debt in a divorce is just like dividing property, but in other ways, it is more complicated. Generally, community property and debt are combined to reach a net community estate value, and then that total value is divided between the parties.

Let’s say, for instance, that a couple has community property of $200,000 and community debt of $50,000. That means the net community estate is $150,000. If the intent was to divide the community equally, then we would want each party to end up with a net of $75,000. That could be achieved in a number of ways.

One way would be for each party to take $100,000 of property and $25,000 of debt ($100,000 – $25,000 = $75,000). At the other end of the spectrum, one party might take $75,000 of property, while the other took $125,000 of property and the $50,000 of debt ($125,000 – $50,000 = $75,000).

One issue that has to be considered when deciding how to distribute the debt is the ability of each party to pay the debt. If one of the spouses has minimal income, it may not make much sense to assign much of the debt to that person, as they may not be able to keep up with it. If that happens, the creditor may still come back after the other party to collect. (Unfortunately the divorce decree awarding the debt to one party does not take away any rights the creditor may have to collect from both parties.) A particularly nasty situation is where one party takes on community debt as part of the settlement, and then declares bankruptcy, leaving the other spouse to face the music.

If possible, it may be a good idea to use some of the community assets to pay off the community debts and then divide what is left, so that neither spouse has to worry about whether the other will actually pay the debts they agreed to pay.

Another consideration that this raises is the affect of paying support on the ability to pay debt. If a spouse has a good income, but is going to be paying child and/or spousal support, that support liability needs to be subtracted from his/her income to determine how much is left from which to pay community debt.