Divorce and Debt: What You Owe and What You Don't

By the time Cherie Kerr and her ex-husband finally went their separate ways, her ex had run up $89,000 in debt during the divorce proceedings alone. She knew that if she didn't take action fast, that debt would scar her financial life forever.

In a way, Kerr knew the marriage was over before it began. Her husband, a home builder, almost immediately asked to borrow $100,000 on Kerr's house to finance his business "and I stupidly agreed," says Kerr, who owns a publicity firm in Santa Ana, Calif.

He said he'd pay her back in six months, but after five years, when the marriage was crumbling -- in large part because Kerr says she didn't trust her husband -- he still hadn't paid her back. He finally managed to do so a few months before the divorce papers were to be signed, and Kerr breathed a huge sigh of relief. Yet, a few weeks later, Kerr learned that her husband had taken out a $150,000 line of credit in both of names and had already spent $89,000 of it."What are you mad about?" her husband asked when confronted with this new development. "There's plenty of money left for you, too."

"I'm not living on borrowed money," protested Kerr, who knew she'd be responsible for paying back that debt. So she spoke with her attorney, who then spoke with her soon-to-be ex-husband.

Luckily for Kerr, her husband managed to pay back the money from the line of credit before they hashed everything out in court.

Kerr barely escaped a financial disaster. Before a divorce is final, the debt your partner incurs during that period is still yours.

"A spouse is and can be held liable in a divorce for the other spouse's debts -- and it doesn't necessarily matter whose name the debt is in," says Richard P. Terbrusch, a matrimonial attorney (nobody seems to call themselves "divorce attorneys" any more) in Danbury, Conn.

So if you've just ended a marriage or are considering calling it quits and wondering what's going to happen to that debt your spouse racked up, it might be helpful to understand a few things.

There Are Two Types of Debt

When it comes to divorce and debt, there are two forms of debt that courts primarily tend to look at: living expenses and community property.

Living expenses are, as you'd imagine, the money you pay for the mortgage or rent, groceries, utilities, your cable or cell phone, and other, similar expenses. Community property is pretty much everything else.

So if you and your spouse owe, say, $3,000 on a credit card that you've been using to pay for groceries, gas and cable, that debt is considered living expense debt. But if the debt you've racked up on your credit card is for gym equipment, a new TV, a freezer-on-top refrigerator -- well, that's community property debt.

Determining the debt you owe begins to get confusing if you have both living expenses and community property expenses on the same credit card. And it gets more complicated if one person had the credit card before the marriage and racked up say, $5,000 in debt on it prior to the marriage, and then during the marriage, both parties added even more debt to it.

At that point, "what debts are separate and what aren't, and what debts you can justifiably say aren't yours is almost impossible," says Bob Nachshin, a matrimonial attorney in Century City, Calif., whose clients have included Will Smith, Rod Stewart, John Ritter and Barry Bonds.

Where You Live Determines Whether You Share That Debt

In community property states, the courts see the debt that's accrued over the course of the marriage as the responsibility of both parties. So if you and your spouse bought a boat for $25,000, and you still owe $20,000 on it, then both parties split that $20,000 debt down the middle.

But what if the husband secretly bought that boat with a credit card that was in his name only and the wife, whose name wasn't on the card, had no clue about its existence? In a community property state, she still owes $10,000.

Likewise, says Terbrusch, "if the wife runs up a credit card in her name alone during the marriage, a portion or all of the debt could be assigned to the husband during the divorce."

Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

If you're living in another state, then how you split your debt is likely done through what's called equitable distribution, in which attorneys and a judge determine who owes what. In other words, if your spouse racked up a lot of credit card debt in secret, you're more likely to come out of your marriage not owing any of that money. But while that makes it sound like community property states belong in the Stone Age, that's not necessarily so.

After all, by splitting everything down the middle, courts are trying to promote the idea that a marriage is an equal partnership, and that if a mom quits her job to stay home and raise the kids while the dad brings home the paychecks, she's entitled to half the assets because she was contributing half her time and energy into keeping the family going. In this case, equitable distribution works to the benefit of both partners.

And while it's different in every state, courts are generally going to take many factors into consideration, from how long the marriage lasted and each person's income during the union to whether either spouse had been wed before, which is relevant if your soon-to-be-ex brought debt to the marriage that was a result of his or her former spouse's out-of-control spending habits.

Lesson to Be Learned

Kerr's experience left her wiser. Her advice for couples in bad marriages: "The minute you split up, or even before you split up, make sure everything is paid for. I know that if I ever got married again, I'd want everything in my name and maybe one joint account, which I'd make sure was buttoned up so we couldn't get into too much trouble. I never want to be that vulnerable again."

If you're saddled with an ex-spouse's debt that's ruining your life, and you don't feel you have any other recourse, there's always the option of bankruptcy. It may be an unappealing option, but since bankruptcy discharges most of what you owe, it does make it possible to divorce a spouse's debt.

And most experts will tell you that if you're going to have to declare bankruptcy, it's better to do it jointly, before you end the marriage -- that's simply because if you're trying to make a clean break, its hard to do so if you're burdened by a large amount of debt that you accumulated during your marriage. While we're not recommending bankruptcy as your first option, if it's clear that it's going to be in the cards, you'd be wise to make it part of the divorce experience, rather than have to deal with it several months later.

And keep in mind that if your partner declares bankruptcy and you don't, you'll be on the hook for all the debt you two accumulated during the marriage. Credit card companies don't care that your ex was a jerk, and that ethically you shouldn't have to pay the $40,000 he or she spent during the years you were married. If your name was on that credit card, the company can come after you for those funds. If your departing spouse declares bankruptcy, that alone may force your hand to declare it as well.

But not all news is bad news.

"Courts are fair," says Naschin, the attorney who has handled a lot of celebrity divorces. Overall, he says, when it comes to deciding whose debt is whose, "most courts aren't jaded and want to do the right thing. And most courts don't want to be reversed in an appeal."

Geoff Williams is a frequent contributor to WalletPop. He is also the co-author of the book Living Well with Bad Credit.