By Laura D’Orsi
I have so many clients who don’t seem to understand what “marital debt” is. Marital debt is debt that is acquired during the marriage. Clients assume that if they have credit cards in their name and their husband has credit cards in his name, then it is solely the debt of that party. That is not always the case in a divorce.
New Jersey, where I practice, is an equitable distribution state. That means that the Judge has discretion as to how to distribute debt acquired during the marriage.
There is a difference between secured debt and unsecured debt. If one party will be receiving the house, it will be subject to the mortgage. Many clients don’t seem to understand that the “value” of the house is only the equity in the home, the value minus the debt. Even though the house may seem like a great asset, the value may be minimal. A house worth $600,000.00 but subject to a mortgage of $575,000.00 is only worth $25,000.00. The house will come with the mortgage payment and other expenses attached to it. If you think you may want to keep the house after your divorce, realize you will be responsible for paying the mortgage and other expenses each month.
If the mortgage on the house is in joint names it will need to be refinanced after the divorce to the sole name of one of the parties. That party will have to have the appropriate income and credit to be able to refinance that mortgage amount to his/ her sole name. If alimony or child support will be paid, that will usually be considered by the mortgage company when completing the refinance. It is important to make sure that you have credit or can obtain a loan when deciding to pursue a divorce. Having employment helps.
Car loans and leases also usually need to be refinanced. If the wife is getting the Audi and the Husband is getting the Buick, they will also get the debt attached to that asset. The loan related to the vehicle will need to be refinanced to each party’s name as well.
With respect to unsecured debt, which is usually credit card debt, the Judge will usually look at the parties’ incomes, what the debt was used for, and if it was used for marital purposes, when deciding how to allocate it. If the credit card debt was used to purchase a trip for one party and their girlfriend, plastic surgery (breast enhancement close to the divorce filing date) or for a unilateral purchase by one party (a fur coat for a wife or a motorcycle or boat for the husband), it may be allocated to one party solely. The timing of the purchase is also significant, the longer time has gone by since the purchase, the more likely it will be considered a marital obligation.
Student loans of the Husband or Wife, are usually attributed to the party who took out the student loan, as it is assumed they will continue to reap the benefit of their education after the divorce. This can become more cloudy if the parties pay off a student loan with a home equity line or marital funds.
It is important to keep proofs of what happened with respect to debt acquired during the marriage. Documents are usually only available for up to 7 years. If you are contemplating divorce, consider contacting your credit card companies to obtain statements for the past 7 years. Also, be careful about making debt in one person’s name a marital debt by moving it to joint names. If your spouse tries to convince to you to take out a home equity loan to pay off their student loans, realize that you may be making this your joint obligation.
If you are contemplating divorce, make sure you have at least one credit card in your name and that your credit is good. Even if you are not planning on returning to the work force, you will need to be able to move utility and other accounts into your own name. If you do not have any credit now is the time to build it up.
The best way to protect yourself is before you get married. It is best to have a prenuptial agreement that sets forth the rights and responsibilities of each party to debts. If you are already married, it is important to learn about your family finances including the debts and obligations that you both have. If you hide your head in the sand and pretend that it ok to be kept in the dark, you may awaken to a nightmare.