When a couple divorces in New York, the court divides all of their marital assets as part of the property distribution. The court also divides marital debt. Some couples divorce with a significant amount of debt included in the divorce. The amount of debt assigned to you in the divorce significantly impacts your future security and economic position.
How Debt is Divided
In New York, assets and debts are both divided using the principle of equitable distribution. This means they are divided in a way that is fair and equitable but not necessarily 50/50. What is considered fair in one case may not be fair in another. Because of this, there is no set formula, and the division is subjective.
It is also important to note that debt is only divided if the court concludes the debt is a marital debt, generally, one that was entered into during the marriage (after the date the couple married and before the date they separated). Separate debts are generally, not divided in the divorce and remain the responsibility of the spouse who incurred them.
What Kinds of Debt Are Included?
The types of debts divided in a divorce are broad. An important fact to keep in mind is that any debt entered into by either spouse during the marriage is considered marital, no matter whose name is actually on the debt. A credit card in one spouse’s name is considered marital debt, even if the other spouse did not know the account existed and didn’t do any of the spending that created the debt as long as the debt itself was incurred during the marriage.
Marital debts can include:
- Vehicle loans
- Utility bills
- Tax debt
- Student loans
- Personal loans
- Mortgages and home equity loans
- Medical debt
- Loans against retirement accounts
- Lines of credit
- Credit cards
- Business loans
If the debt was incurred during the marriage, it is a marital debt and must be listed, addressed, and distributed in the divorce.
How the Court Divides Debt
In determining what would be an equitable distribution of your marital debt, the court will consider a variety of factors, including:
- Whether maintenance (spousal support) is being ordered, in what amount, and for how long
- The length of your marriage
- The incomes and income potential of you and your spouse
- The financial position of you and your spouse
- The distribution of marital assets
- The contributions you and your spouse made to the marriage (for example, as the primary earner or as the primary caretaker of the children) and the household
- The children’s needs and which spouse will be responsible for these
- The age and health of you and your spouse
- Each spouse’s spending habits (reckless spending by one spouse during the marriage may lead the court to assign more debt to that spouse)
Implications of Debt Division
Debt division occurs hand in hand with asset division in a divorce. The goal of the court generally is to position each spouse for future financial success. It is important to note that the court seeks to create a balance of assets and debts. If you are awarded a large asset, you are likely to be responsible for the large debt that is associated with it (for example, a home and the mortgage that goes with it). Additionally, the court looks to offset debts with assets, so that each spouse emerges from the divorce with a net worth that is fair considering their position.
An important issue in debt division is the fact that many debts will have both spouse’s names on the debt instruments and the determination by the court that just one spouse is responsible for each debt does not change the legal responsibility related to the debt instruments. If both spouses’ names are on the mortgage and the court determines Spouse A is responsible for the mortgage, Spouse B’s name is still on that mortgage instrument – the divorce court cannot remove legal liability for a debt. If Spouse A fails to make the payments, Spouse B is still liable for the debt to the lender. The court may direct spouses to refinance debt to remove each other’s names, but legal liability remains for both spouses.
It is also possible for the court to assign a percentage of responsibility to each spouse for a debt. For example, one spouse could be directed to be responsible for 20 percent of a debt with the other carrying 80 percent responsibility moving forward. Again, this does not change each spouse’s responsibility to the lender regarding the debt instrument. If the spouse ordered to pay 80 percent fails to fulfill that obligation, the other spouse will be held responsible for the full amount by the lender.
In any circumstance in which a court assigns responsibility (or a percentage of responsibility) for a debt to a spouse, and that obligation is not fulfilled, the other spouse can return to court to seek enforcement of the order. If Spouse A is assigned responsibility to pay a mortgage, does not do so, and the lender requires Spouse B to pay the debt, Spouse B can return to court and seek reimbursement from Spouse A for this.
Additionally, if your former spouse dies and the debt is still in both names, you become fully responsible for that debt after their death.
Because of the complex implications of debt distribution during divorce, it is essential that you work closely with your attorney and financial team to reposition your assets and debts. Divorce requires a complete reset of your economic situation. The court order creates the new financial framework, but a creative team will be able to position you so that the debt you are now responsible for is managed wisely.