calculator and money

Dividing Debt

The other day I was listening to a Dave Ramsey podcast and a woman called in that was getting a divorce but the final divorce settlement had not yet been determined. She was calling in to ask how she needed to handle her current debt as she could not keep making the payments required and support her children. The first question he asked her was whose name the debt was in and she answered, “just mine.” Ouch. To make matters worse her income was roughly 70 percent less than her soon-to-be ex’s and they had zero assets to sell. They did not own a home nor a vehicle. I started thinking to myself, “I wonder how many of my readers find themselves in a similar situation.” I determined that the number was most likely relatively high based on my personal experience with past clients and the fact that an article published by CNBC last year reported that 43% of Americans have been carrying a credit card debt for two or more years and the average household with credit card debt owes $16,883. If you couple that with the fact that the average household income (that is the income for the entire house) in Arkansas is roughly $57,000, which makes the average individual income $29,000. If one person is stuck with all of the debt that equates to 58 percent of their income making it nearly impossible to pay the debt and support their family. The advice given by Dave Ramsey was first and foremost is that she needed to make sure her children were taking care of first and then try to pay the minimum payments if she could until the divorce was settled. My advice to her would be similar in that she needs to put her family first by making sure her children’s needs were taken care of and then worry about the debt, but from an attorney’s point of view, we need to get this case settled as soon as possible.

Dividing debts can be an especially contentious issue since neither spouse wants to end up paying more than his or her fair share. Debt division works in a similar way as asset division. In general, if the debts are acquired during the marriage then they are considered marital debts that can be divided equally. If the debts were acquired before the marriage, then they are typically considered to be the sole responsibility of whoever acquired them at the time. As with most law cases, it is not always that cut and dry. There are many factors the courts will consider, one of which is if those premarital debts were transferred to a joint account, i.e., transferred to another credit card for lower interest or to consolidate debt. In other cases such as those involving student loans, although the debt is in only one person’s name, the loan could be viewed as an investment by both spouses to help improve their household income in the future. The judge may rule that the student loan debt is the responsibility of both spouses.

Yes, Arkansas is an equitable distribution state, but as I have mentioned in past blogs, equitable is not always equal. Check out this past blog about division of marital property. When there is a significant disparity in incomes, as in the case of the woman that called into the Dave Ramsey show, a judge may determine that a fair settlement would be to require one spouse to take more responsibility for the debt to be considered “an equitable distribution.”

Another bit of advice, if you are going through a divorce and have joint credit cards cancel them to avoid a further debt accumulation by the other spouse that may cause more debt to accumulate. Keep detailed records of your charges once you separate to prove who incurred the debt.

Call Kevin Hickey Law Partners today so we can help reduce some of the stress during this uncertain chapter in your life. Let us help you navigate the complex world of divorce, property and debt division. Our experience can help you understand what your options going forward may be and how to negotiate a settlement in your and your children’s best interests.