Dividing Debt in a Divorce | Tennessee Debt Division Law
Dividing debt in a Tennessee divorce and debt division law. What to do with credit cards, mortgages, and other joint debt accumulated during the marriage.
Division of Marital Debts in Tennessee Divorce: A Practical Approach
Just like marital property, debts that accrue during marriage are divided between spouses when they divorce. The trial court will not divide a debt that was accrued before or after the marriage. Marital debts include those incurred by both spouses and also those incurred by either individual spouse during the course of the marriage. If possible, however, the courts will assign a debt to the spouse who receives the asset acquired by the debt. According to Alford v. Alford, 120 S.W.3d 811, 814 (Tenn. 2003) (citing Mondelli v. Howard, 780 S.W.2d 769, 733 (Tenn. Ct. App. 1989)), Tennessee courts use four factors to allocate and divide marital debts:
- the debt’s purpose;
- which party incurred the debt;
- which party benefitted from incurring the debt; and
- which party is best able to repay the debt.
A Tennessee Court of Appeals case, Martin v. Martin, 155 S.W.3d 126 (Tenn. Ct. App. 2004), illustrates how courts apply these four factors. Mr. Martin and Mrs. Martin were married for thirty years. Roughly halfway through his marriage to Mrs. Martin, Mr. Martin began purchasing and selling commercial real estate. Mrs. Martin worked for the business for a period of time, and over the course of the marriage, the Martins bought and sold between 150 and 200 residential properties. After 30 years of marriage, the Martins accused each other of inappropriate marital conduct and adultery and filed complaints for divorce. The Martins accrued a substantial amount of debt during the marriage and owned 33 properties at the time of the divorce, many of which were rented to tenants.
The trial court awarded Mrs. Martin a divorce based on Mr. Martin’s inappropriate marital conduct and ordered a distribution of the marital property and debt. The trial court found that it would be not be economical to sell the 33 residential properties owned by the parties and instead ordered Mr. Martin to make a one-time payment of cash in full to Mrs. Martin for her share of the properties. He was also ordered to pay his credit card debt, portions of his Supplemental Security Income that were overpaid and needed to be repaid, IRS quarterly taxes, and all of the property taxes on the real estate for the year of the divorce.
Mr. Martin appealed, claiming that the trial court’s distribution of marital debt was inequitable. First, Mr. Martin claimed that he was unable to obtain financing on the properties to follow the court’s order to pay Mrs. Martin in cash for the residential properties. Mr. Martin then claimed that the trial court erred in making him responsible for the credit card debt, the IRS debt, the Supplemental Security Income debt, and the real property tax debt. The Tennessee Court of Appeals affirmed the trial court’s division of marital debt. The appellate court dismissed Mr. Martin’s first contention that he could not pay Mrs. Martin cash for her share of the properties and found that Mr. Martin would be able to refinance some of his rental property to secure a loan that would repay Mrs. Martin for her share of the property.
In response to the issue of dividing marital debts, the appellate court looked to the four factors set forth in Mondelli v. Howard. The first Mondelli factor considers the purpose of the debt. Because the trial court held that Mr. Martin was required to purchase Mrs. Martin’s interest in the residential properties, Mr. Martin was held responsible for the property taxes on the real estate. The second and third Mondelli factors look to which party incurred the debt and which party benefited from incurring the debt. Mr. Martin incurred the credit card debt mostly during the separation of the parties prior to divorce. Accordingly, the credit card debt was held to be Mr. Martin’s debt at divorce. The fourth Mondelli factor examines which party is in the best position to repay the debt. The Tennessee Court of Appeals held that Mr. Martin’s ability to repay the IRS for quarterly taxes was much greater than Mrs. Martin’s and therefore awarded the debt to Mr. Martin. Similarly, Mr. Martin was in the best position to repay the Social Security debt because the amount to be repaid was “speculative.”
Although many of Mr. Martin’s debts were technically accrued during the marriage, the court used a practical approach to ensure the debt was assigned to the party that incurred it. The four Mondelli factors ensured an equitable distribution of debt that examined the circumstances surrounding the accumulation of the debt rather than the timing of the debt.
Joint Debt Problems
Divorce does not affect who must repay joint debt. Even if one party agrees to pay it, if that party does not actually pay it, the other is still liable for the debt. In Tennessee law, all divorces must contain a “Notice on Liability to Creditors,” similar to this one:
Pursuant to Tenn. Code Ann. § 36-4-134, each party acknowledges that he or she has been advised that a divorce decree does not necessarily affect the ability of a creditor to proceed against him or her or his or her property, even though he or she is not responsible under the terms of the decree for an account, any debt associated with an account, or any debt and that it may be in his or her best interest to cancel, close or freeze any jointly held accounts.
Knowing about joint debt is the first step. We recommend you run your own credit report and make sure you recognize all of the debt listed. If you don’t, you should investigate anything suspicious.
Resources, References and More:
- Property Division in Tennessee Divorce
- When Professionals Divorce in Tennessee: Valuing Professional Practices
- Business Valuation in Tennessee Divorce Law
- Property Division – Tennessee Family Law Blog for analysis, commentary, updates and case law summaries
- The Tennessee Divorce Client’s Handbook: What Every Divorcing Spouse Needs to Know