March 10, 2025

Divorce and Debt: General Financial Considerations

The division of debts is often one of the most contentious aspects of a divorce. Whether you reside in an equitable division state or a community property state significantly impacts how your financial obligations will be allocated. By understanding these distinctions and implementing best practices, you can better protect your financial future and achieve a more secure post-divorce life.

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Understanding the Debt Landscape

As with the division of assets, the state in which your divorce takes place matters for how debts are divided. Specifically, states are either separate property states or community property states. Refer to the previous section for more information about these distinctions.

Once you know your state’s rules, document all separate and non-marital debt owed by each spouse. Your attorney can help you identify what your state considers non-marital debts. Commonly, debts that were incurred prior to the date of the marriage are considered non-marital.

Also try to determine whether any non-marital debts were paid from marital assets or income earned during the marriage. Consideration may be given to the balance of the separate debt on the date of the marriage and the balance that remains today. In some states, the balance of non-marital debts paid with marital assets are factors considered when determining the settlement agreement.

Secured vs. Unsecured Debt

The character of the debt must also be considered. Characteristically, debt is either secured or unsecured.

Secured debt means that the debt is established, and secured by, the value of an asset. Common examples of secured debts include mortgages and car loans. Typically, the spouse that will receive the asset in a divorce will also be responsible for paying the associated debt.

Unsecured debts are all other debts. These are personal debts that are not collateralized by any specific asset. The repayment of such debts is simply based on the promise of the individual(s) named in the debt agreement. These debts include credit cards, student loans, and personal loans.

Types of Debts

Credit Cards

When you go through the process of listing all the assets and debts in the marital household, you should also make a note of who is listed on the debt agreements. Credit cards may be held jointly, individually, or in one name with an authorized co-signor.

Generally, credit card balances incurred for the benefit of the household are considered marital property, regardless of whether one spouse or both are listed on the card. However, speak with your attorney to discuss the specific state rules. For example, secret credit cards for individual purchases or spending by one spouse may be subject to different rules.

Mortgage and Home Equity

As noted earlier, mortgage and home equity debts are secured against the value of the residence. In these cases, the party that receives the residence in the divorce typically remains responsible for payment of the mortgage debts.

In cases where a loan for home equity was taken out and used for other purposes not related to the home, document those purposes and estimated spending amounts. First, there may be tax implications for the deductibility of mortgage interest. Under current law (in 2025), according to the IRS, interest on mortgage balances traced for purchases for anything not used to “buy, build, or substantially improve the residence” is not deductible for tax purposes. Moreover, inform your legal team about how the home equity loan dollars were used during your marriage, as this can impact property settlement.

Auto Loans

Auto loans are also secured debts. Typically, the spouse that retains the vehicle remains solely responsible under the divorce agreement for repaying the associated loan.

Business Debts

Owning a business in a divorce adds a lot of complexity, particularly if the business has its own debts. These debts may be secured against assets owned by the business, such as equipment, or be unsecured such as a line of credit with a bank.

To navigate the division of business debt, determine how the business ownership is structured, and whether any personal guarantees for business debts exist. It is quite common for banks to require personal guarantees for business debts from the business owners, and often, their spouse. The loan agreements should be reviewed and documented as well. In some cases, changing the ownership structure of a business (as often occurs during a divorce) may violate certain debt covenants with the bank.

Generally, the spouse who retains ownership of a business will be responsible for paying the business debts. However, careful planning is required ensure compliance with loan agreements and to determine how each debt will be handled in a divorce.

Student Loans

States vary with how student loans are considered in a divorce settlement. Consult with your attorney to determine how student loans are handled in your state. In some cases, student loans incurred before a marriage are considered separate property and those incurred during the marriage are marital, regardless of whether both spouses are on the loan agreement. However, in some cases it may also depend on how the loan dollars were used. The treatment of loan dollars that are used for tuition and direct education expenses may differ from those dollars used for living expenses. As such, it may be beneficial to estimate and document how the loan dollars were used.

Debts Incurred After Filing

Liability for debt incurred during a separation, and before a divorce is finalized, varies by state. Some states recognize these debts as martial, while others treat this debt as the responsibility of the spouse that incurred the debt. Consult with your attorney to determine how these debts are handled in your state.

Recommendations and Best Practices for Debts

Request to be removed from debts you are no longer responsible for under the separation agreement.

Lenders may still try to hold you responsible for debts you are listed on but not responsible for under your separation agreement. According to the Consumer Financial Protection Bureau, although a divorce decree may allocate debts to a specific spouse, a creditor often can still collect from anyone whose name is listed as a borrower on the loan or debt. As such, be sure to request that a spouse who retains debt takes the additional step of either removing the other from the debt or refinancing the debt in their own name.

For revolving credit lines such as credit cards, any joint cards should be paid off and closed.

Have a specific plan to pay the debts you are responsible for.

Before the divorce agreement is finalized, understand your payment responsibility and develop a plan for paying loans you will be responsible for. In certain cases, it may be necessary to sell assets to pay off debts that will be difficult to cover under your new budget.

Work with specialized professionals, such as a divorce mortgage expert as needed.

Divorce often drastically changes the income and financial situation of those who go through it. For example, if you retain the marital home with an associated mortgage, you will likely need to qualify for the mortgage financing on your own. This can be troublesome when working with a bank or mortgage professional with little experience in dealing with divorce situations.

Consider working with a lending professional with the knowledge and experience in dealing with similar situations. For example, lending professionals with the Certified Divorce Lending Professional (CDLP®) certification have specialized training in divorce situations. To find a CDLP® in your area, you can use this online search tool.

If possible, pay off debts as part of the separation agreement.

Sometimes the simple path is the best path. As you seek a fresh financial start, it may make sense to simply pay off certain marital debts from marital assets as part of your separation agreement. Once loans are paid off, it becomes much easier to simply close the loans as paid without going through the hassle of refinancing or attempting to remove one spouse’s responsibility in paying the debt.

Conclusion

Navigating debt during a divorce requires a thorough understanding of your state's laws and a meticulous approach to documenting and addressing each financial obligation. Whether you're dealing with credit card balances, mortgages, business debts, or student loans, clarity and proactive planning are essential. By working closely with legal and financial professionals, you can ensure that your debts are handled fairly and effectively. Implementing the recommendations discussed, from requesting removal from joint debts to developing a solid repayment plan, will empower you to achieve financial stability and move forward with confidence. Ultimately, a well-informed and strategic approach to debt management during divorce can pave the way for a more secure and prosperous future.

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