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Who Pays for Marital Debt?
Frequently in divorces, couples are not arguing over who gets what asset, but who is responsible for which debt. When it comes to dividing up debt in a divorce, the same guiding principles that are used to divide up assets are also used. Generally, all debt that a party incurs before the marriage is considered separate debt, and all debt incurred after the marriage is considered marital debt. However, there are exceptions - for example, usually student loans accumulated during the marriage will continue to be the sole responsibility of the individual who obtained the education. As for marital debt, the court will divide it up on an equitable basis – that is, what is fair under the circumstances. This may mean a 50/50 distribution or in some other proportion.
It is all Marital Debt until the Divorce Decree
Colorado is different from most states in terms of how debts are treated after the divorce action is filed. Most states provide that marital debt does not accumulate after the divorce has been filed. Colorado, however, provides that all debt accumulated until the Decree of Dissolution enters (which typically happens at the end of the case) is still marital debt, even if the parties have physically separated. Additionally, because Colorado is a no-fault divorce state, the Court will not allocate debt based on marital misconduct of either of the parties. However, economic fault may be considered in dividing up debt. For example, if while the divorce is pending, one of the parties has run up credit card bills without the permission of the other party, the court can allocate 100% of that debt to the party that incurred the debt. However, if the case is not clear cut, the court can still decline such treatment and order that each party is responsible for half of the debt (this may be the case if the debt was used for reasonable family support & children’s’ expenses).
Temporary Injunction
Once a divorce action is filed, a mandatory “temporary injunction” is put into place. This states that neither party may dispose of, encumber, or transfer marital assets without permission from the other party or court order. In other words, neither party can use marital funds for anything other than reasonable living expenses. Thus, it would be a violation of the temporary injunction if one of the parties began paying down credit card debt with marital funds (beyond the minimum payment).
The Judge
While the divorce is pending, there may be disagreement as to who pays what debts. If the parties cannot agree, they can request a temporary orders hearing where the Judge will decide who pays for what debts while the case is pending.
Who Is Responsible?
Often times it is either impracticable or impossible to liquidate all the marital assets in order to pay off debt. Thus, when deciding which party to allocate marital debt to, the court will consider each party’s financial situation, in an attempt to allocate the unpaid debt in a manner such that each person can move towards financial independence from the other. Frequently this means that the higher earning spouse will get more of the debt, but in turn the chances of alimony or spousal support being paid to the other spouse will decrease. Also, the court will take into account who is the recipient of any assets secured by a loan (for example, a residence with a mortgage).
Coming to an Agreement
When possible, the parties are encouraged to agree upon allocation of the debt, as there are a number of protective provisions that can be incorporated whereas if the parties had gone to hearing, the court does not have jurisdiction to enter the same relief. For example, a divorcing couple has a joint Visa credit card debt. The parties agree that the husband is responsible for the Visa credit card. Generally, credit card companies will not remove the other spouse’s name from the liability until it has been paid off in full. If the husband defaults on the credit card, the creditors can still come after the wife for payment of the balance, regardless of what the divorce paperwork states. However, the wife can protect herself by ensuring that there is indemnification language in her agreement, which means that she can request reimbursement from the husband for having to pay on his behalf. If the parties cannot agree and must have the Judge decide then such protective relief will not be available.
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