“Eddie, I want half.” Be careful what you wish for. The famous line from his famous stand-up special Eddie Murphy Raw was an indictment on modern-day society. These days, 40-50% of marriages in America end in divorce. Spouses argue over distribution of assets. They also fight about paying off debt.
Truth be told, “half” is only on the table if you live in a community property state. There are nine of them: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. You can also “opt in” for community property rights in Alaska.
Those shared property rights include debt, so be prepared to split the liabilities along with the assets. When you take on debt while married in one of these nine states, your spouse is responsible for half of it. That’s how community property laws work.
When debt has accumulated to the point where neither party is able to cover their end, the answer may be a debt consolidation loan. If this is done before the final judgement, the borrower can ask the judge to account for that in the divorce agreement. You may consult your divorce lawyer on what to do next.
Community property vs. common law
Most states east of the Rockies and north of the Mason Dixon Line (remember geography?)—with the exception of Wisconsin—have a common law position on distribution of property rights in a marriage. Spouses can actually own their own assets and accumulate their own debt.
According to a divorce lawyer, in divorce that means that each spouse is responsible for the debt they’ve taken on in their own name, but both spouses are equally responsible for joint accounts. The same rule applies to assets, but distribution of those can be negotiated in a divorce settlement.
Here’s the good news: Neither of these systems is immutable. Judges can rule to award assets in any way they see fit. Circumstances will usually determine who gets the lion’s share and who gets the shaft, so be nice to your spouse—even if you’re expecting to divorce.
Tips for dealing with joint accounts
There are stories about spouses who divorce and continue to share bank accounts and credit cards. Santa Claus and the Easter Bunny read those tales to their kids. Reality doesn’t really work that way. Once divorced, it’s best to sever all financial ties to avoid future conflicts.
Credit cards are where joint accounts are most commonly seen, and they are the most difficult to split when spouses separate or divorce. The credit card company may not be willing to split the debt, meaning that one party refusing to pay could ruin the other party’s credit.
If one spouse can get approved for a balance transfer card, the best move is to transfer half of the balance owed on the joint account. When that’s not possible, the joint account should be paid in full and closed. That could be built in the terms of your divorce agreement; you can consult your divorce attorney for this.
Refinancing mortgage debt or selling your home
Physical property is a different animal. A mortgage is typically a joint account, but unlike credit cards, it has an asset attached to it. If possible, one spouse should request that the bank refinance under their name so they can keep the house. That’s Option #1.
When a refi is impossible due to financial circumstances, sell the house. Split the cash between the two of you and walk away. There’s always an opportunity to start over. The same principle can be applied to joint auto loans. Refi or sell. Those are your best choices.
Obviously, the best option in a divorce is to have an amicable separation and not have to fight about money issues. Unfortunately, that’s not usually the case. Community property and common law offer some protection, but nothing beats a good lawyer.