Divorce can be a complicated and emotional process, especially when it comes to dividing assets and liabilities. One of the biggest concerns for many couples going through a divorce is how their debts will be divided. The following is an explanation about how liabilities are divided in divorce and what factors are taken into consideration during this process.
Equitable distribution vs. community property
Family courts generally follow one of two approaches when dividing debts in divorce: equitable distribution or community property. Equitable distribution is the more common approach and is used by most states, including Illinois. This approach involves dividing assets and liabilities fairly, but not necessarily equally, based on factors such as the length of the marriage, the earning capacity of each spouse and the contributions of each spouse to the marriage.
Community property, on the other hand, is used in a few states, including California, Texas, and Arizona. Under this approach, all assets and liabilities acquired during the marriage are considered to be owned equally by both spouses, regardless of who acquired them. This means that debts are divided equally between the spouses, regardless of who incurred the debt or whose name is on the account.
Type of debt
Regardless of which approach is used, there are several factors that are taken into consideration when it comes to marital debt divided in divorce. The type of debt and how it was incurred can play a role in how it is divided. For example, if a debt was incurred for the benefit of the family, such as a mortgage or car loan, it may be divided equally between the spouses. However, if a debt was incurred solely for the benefit of one spouse, such as a credit card debt incurred for personal expenses, that spouse may be responsible for paying it off.
Ability to pay
If one spouse has a significantly higher income or earning capacity than the other, they may be required to take on a larger share of the marital debt divided in divorce.
Contributions to marriage
The contributions of each spouse to the marriage: This includes both financial contributions and non-financial contributions, such as caring for children or managing the household.
Length of the marriage
In some states, the length of the marriage may be a factor in how debts are divided. For example, if one spouse incurred a debt shortly before the divorce, it may be considered separate property and not subject to division if the marriage was relatively short.
It is also important to note that even if a debt is assigned to one spouse, both spouses may still be held responsible for it if it is not paid. For example, if a credit card is in one spouse’s name but both spouses are listed as authorized users, both spouses may be held responsible for paying the debt if the account becomes delinquent.
Planning to deal with debt after divorce
After the settlement between you and your spouse is finalized, you will need to address your changed circumstances when it comes to your debt liabilities as well as other financial aspects of your life that may have been impacted. In order to give yourself the best chance of thriving financially it will be a good idea to develop a comprehensive financial plan with your debts in mind. Finding a professional financial advisor is probably a good idea.
Fortunately, Purposeful Wealth Advisors can provide you with quality Chicago divorce financial planning that will be tailored to your specific situation. Our professionals will work closely with you to implement a strategy that will be aimed at achieving your specific financial goals, including issues related to divorce and debt.