Who is Responsible for Debt in a Divorce?
What happens to debt in a divorce? For more information, see Debt Division in Tennessee Divorce.
VIDEO TRANSCRIPT:
Tracy Coenen: How do debts get valued in a divorce? And who has to be stuck with those debts when the divorce occurs?
Miles Mason: That’s a great question and especially given the recession, a big issue, no question. State law is going to control, but I think most states are pretty set on this. First question, was the debt for marital purpose? For example, a couple with kids. They go to Walmart, they’re going to be buying the things that you get at Walmart. It’s going to be for the house. It could be household goods. Could be cleaning supplies, could be food, clothes. But contrast that with a diamond tennis bracelet for a girlfriend. Well, that’s not going to be for a marital purpose, or a watch for a boyfriend, whatever the case may be. If there’s a charge on the Visa for an item such as, like I said, a gift for somebody that’s, that’s outside the marriage, that’s going to be treated completely differently than a $300 charge at Walmart. Courts call that marital purpose.
So who incurred the debt? Obviously an important question. Timing to the divorce filing.Technically all debt incurred during the marriage for marital purposes is going to be marital debt. But sometimes courts look at debts in reality a little bit different depending in relation to the divorce filing. Had a case a few years back where a wife hired her divorce lawyer, and then went out and bought about $12,000 worth of furniture and then a $30,000 SUV all within the same week.
Well, the question is, did that particular wife need a brand new $35,000 SUV in addition to $12,000 of new living room furniture? Probably not. That spouse who made the purchase is probably going to get those assets and get that debt. So also looking at who benefited from the assets purchased and that sort of thing. And so mostly it’s common sense. Where it gets difficult is when a couple has, my favorite are the Seadoos. Everybody went out and bought Seadoos in the ’80s and ’90s, and they’ve still got them and nobody wants them. And let’s say they bought them relatively recently, and they still owe debt on it. So that’s always difficult because nobody wants the Seadoos, and nobody wants the debt on the Seadoos.
Tracy Coenen: Do the creditors have to honor what the judge has said in divorce court?
Miles Mason: Absolutely not. And this is something that’s a very good and important additional value that a forensic accountant can bring. I mean, lawyers will tell clients all the time about this, but they never listen. So the forensic accountant needs to know. Joint debt is joint debt. And even though one party is ordered to pay that debt, if that debt is not paid, credit will come after both people. And that is a major problem in a lot more divorces than you can imagine.
Thank you to Tracy Coenen, CPA, CFF for inviting me to join her in this video series. Tracy is a nationally recognized forensic accountant practicing in Milwaukee and Chicago.
