Dealing with Debts in Your Divorce

When a couple divorces both parties are often more focused on the division of their assets and properties than they are on the division of their debts. However, the ways marital debts are divided could have a long-term impact on a person’s future plans for retirement, business ownership, educating children, and more.

A High-Level View of How Debts Are Classified in an NYC Divorce

Generally speaking, debts – like assets – are classified as marital or separate. Marital debts are those which accumulated during the course of the marriage, whereas separate debts are those which accumulated before you were married, or after the so-called “date of commencement” of your divorce proceeding. There are exceptions to these “rules,” and your divorce attorney can walk you through them during your initial consultation.

Can My Spouse and I Reduce Our Marital Debt Before the Divorce is Finalized?

Yes, you can. In the event that there is no prenuptial or postnuptial agreement that outlines how debts and assets will be divided, if both spouses agree to pay off marital debt before the divorce is finalized, they are certainly free to do so.

You can also address reducing or eliminating debts with your attorney and financial advisor:

Throughout your collaborative divorce
In mediation
During negotiation

What About Credit Card Debt?

Credit cards are tricky. If both spouses are named on the account, the debts will likely be classified as marital. If only one spouse is an account holder, that debt could be classified as separate property, depending on when it accrued and what it was used for. For example, if you are the sole account holder on a credit card that is used to purchase furniture for a home, then it should be classified as marital debt. However – and this is important – the lender does not care how your debt is classified. Per Experian:

During divorce proceedings, the judge has the right to assign a credit card debt to you, even if you aren’t technically liable for it. For example, you could be on the hook for a credit card debt that’s only in your spouse’s name, depending on what it was used for. The same rule goes for your spouse—they could be held responsible for a debt that’s solely in your name if the judge assigns the debt to them in a divorce decree, which is legally binding.

This can get complicated, however. A divorce decree won’t change the contract on the debt, which means the original account holder will retain their responsibility as far as the creditor is concerned. If your spouse refuses to pay the assigned debt, the credit card issuer may come after you. The creditor has a right to continue their collection efforts since the original agreement was between you and the credit card issuer. A divorce decree does empower an ex-spouse to sue their former partner if they don’t handle a debt assigned to them, though.

Credit card companies are not outliers when it comes to collecting debts, so make sure to close any joint accounts as soon as the debt is paid. If your spouse is listed as a user of an account, remove his or her name as soon as possible. When you speak with your attorney and financial advisor, make sure to bring your credit card statements with you. This will help strengthen your position regarding the division of credit card debt.

Reducing Debts After a Divorce

Once your assets and debts are divided and your divorce is finalized, you may find yourself in more debt than you expected. Aside from collateral debts, like a mortgage or car loans, many people find themselves shouldering student loans and medical debts (see Medical Bus. Assocs. v. Steiner, which establishes a doctrine of “necessaries” – obligations both spouses to a marriage have to provide for one another). Business owners who used business assets as collateral for personal expenses (or vice versa) may also find themselves burdened with unexpected debts.

Working with a financial advisor during and after your divorce may help you prepare for just such a predicament. However, if you are caught unawares, or suffer some kind of unexpected setback during or after your divorce, you should know your options for reducing your debts.

Downsize where you can. If you have retained possession of the marital home, now might be the time to sell. If selling is not realistic, consider refinancing your property(ies).
Take advantage of grants and loans for your business. There are ample opportunities for small business owners in New York to obtain grants and loans to help keep your business running. Once you know your business is secure, you can focus on reducing your personal debts.
Pay yourself first. There are tax benefits to contributing to retirement accounts and creating trusts. It might seem counterintuitive to put more into your retirement funds at a time when you could use the extra money the most, but you could potentially put more money in your own pocket by utilizing these tools. Be sure to speak to your tax attorney first to ensure this will do more good than harm.

Snowball vs. Avalanche Methods of Debt Repayment

As always, it is best to consult with your financial advisor about what your needs are, and how best to address them in the short term and long term. However, there are two general strategies for paying off debts:

The debt avalanche method involves making minimum payments on all debts except the one with the highest interest. You take whatever remaining money you have earmarked for all debts and pay off the one with the highest interest rate. Once that is paid, you move on to the debt with the second-highest interest rate (and so forth) until all debts are paid.
The debt snowball method has you pay off your smallest debts first, no matter the interest rate. Then, you take the money you would have applied to Debt A and apply it to Debt B (and so forth) until the debts are paid.

Dealing with debts can be a challenge. Choosing the right attorney to represent you need not be. Call Berkman Bottger New & Schein, LLP us at (212) 466-6015 or fill out our contact form to reserve a consultation. Proudly serving Manhattan, Westchester, and Bergen County, NJ.