Understanding Personal and Marital Debt Division in North Carolina Divorce
Understanding Debt in North Carolina Divorce: An Overview
Dividing debt is one of the most important components of divorce in North Carolina. Similar to parties’ assets, debts must be carefully identified, classified, valued, and distributed in the property distribution process. Whether it’s a jointly held mortgage for the marital home, a credit card in one spouse’s name, or an auto loan for a spouse’s vehicle, debt allocation plays a large role in the equitable distribution process and can have an even larger impact on your financial future.
In North Carolina, courts and divorcing spouses follow a process known as equitable distribution when dividing marital property, including debts, amongst spouses. The process involves identifying, classifying, valuing, and ultimately distributing marital and divisible property and debts amongst spouses. A key part of this process is the classification of debts held by spouses as separate debt, marital debt, or divisible debt, given that the classification will ultimately control what debts are divided amongst spouses in the process.
While an equal division of marital and divisible property is generally favored and indeed presumed to be equitable, sometimes a fair division of property will involve an unequal division of marital property and divisible property. In the context of debt division, it is even more common for one spouse to receive more debt than another, given that sometimes large debts are tied to larger assets such as marital mortgages, which encumber marital homes.
Defining “Marital Debt” in North Carolina
Marital debt is generally defined by two key elements, which both must exist for a debt to be considered marital. First, in order to be considered a marital debt, a debt must have been incurred by either spouse after the date of marriage and before the date of separation. Second, a debt must also have been incurred for the joint benefit of the parties in order to be considered a marital debt. Thus, if a debt was incurred both during the marriage and prior to separation and for a joint benefit, the debt will be considered marital.
It is important to understand that the title of debt alone will not control whether a debt is marital. For instance, if one spouse incurs credit card debt in their sole name during the marriage but the debt was for regular family expenses such as groceries, utilities, meals, and other day-to-day expenses, that debt may still be considered marital regardless of the fact that it’s only held in one spouse’s name. Similarly, such a debt might also still be considered marital even if one spouse was not previously aware of the debt.
Examples of marital debt may include:
- Mortgages, home equity lines of credit, and second mortgages on a marital home;
- Credit card charges for routine spending;
- Auto loans for vehicles used by the family
- Loans taken to pay for children’s education and potentially even a spouse’s student loans incurred during the marriage;
- Medical bills incurred by a spouse or for children during the marriage.
Ultimately, if a debt is considered marital, a Judge or parties will need to divide the debt as part of the equitable distribution process.
Understanding “Separate Debt” and “Divisible Debt”
Separate Debt
Separate debt is not distributed in the equitable distribution process. Rather, separate debt will remain the responsibility of the party incurring the debt.
In general, separate debt includes the following categories of debt:
- Debt incurred before the date of marriage or after the date of separation; and
- Debts incurred during the marriage that did not provide a joint benefit to the marriage.
A common form of separate debt in many marriages is student loan debt incurred prior to marriage. If such a debt was incurred entirely before the parties’ marriage, then the debt will remain that particular spouse’s sole responsibility following divorce.
Separate debt also importantly includes those debts which were incurred during the marriage but were not incurred for a marital benefit. For example, if a spouse were to incur substantial credit card debt for gambling unbeknownst to their other spouse during the marriage, this debt would likely be considered a separate debt, given that no marital benefit flowed from the gambling. This also means that debts incurred in furtherance of marital misconduct, such as an affair, might also be considered separate debts of the spouses incurring the debt, which serves as a form of protection for the spouse who was unaware of such spending.
Ultimately, whether a debt incurred during the marriage will be considered a marital debt or a separate debt is going to be a case-by-case determination, depending on your family’s spending habits and finances. Whereas certain spending, such as gambling, is more clearly only for the benefit of one spouse, other spending might not be a clear-cut, given that every family’s spending habits are different.
Divisible Debt
While separate debt is not distributed in equitable distribution, the final category of debt—divisible debt—is distributed amongst spouses. Divisible debt is specifically defined by North Carolina law as “passive increases and passive decreases in marital debt and financing charges and interest related to marital debt” incurred after separation but before the distribution of property. Generally, this means that Courts can divide post-separation interest and other financing charges related to debt incurred during the marriage. This can be especially important when dividing large credit card balances, medical debt, and student loan debt acquired during the marriage.
How North Carolina Courts Divide Marital Debt
Once a Judge or spouses have identified, classified, and valued marital debts and divisible debts, the final step is to actually divide those debts amongst divorcing spouses. While the general focus is to achieve an equal division of marital and divisible property, an equal division is not always equitable. Even more important, though, is that oftentimes an equal division of marital and divisible property will not necessarily mean an equal division of debt.
An equal division of debt is less common, given that debts cannot as easily be transferred in a divorce like assets might be, to the level of the distribution between spouses. Due to this, it may be that one spouse receives more debt but also receives additional assets to compensate for their larger debt load in the divorce. For example, while one spouse might be responsible for the mortgage, they would also be responsible for the marital home associated with that mortgage.
When deciding who receives a debt, the Judges will consider certain factors such as whether the debt is associated with an asset, the party who incurred the debt in the first place, and the financial resources and obligations of the parties following divorce. It is generally expected, although not required, that debts encumbering assets, such as an auto loan encumbering a vehicle, will be distributed to the party receiving the associated asset. Debts will also often be distributed to the party incurring the debt in their name, although this is not always the case. When it comes to post-divorce finances, a Judge might also tend to favor distributing a debt to a party with more substantial income with which to pay the debt following divorce, although they are not required to do so.
Common Types of Debt and Their Treatment in Divorce
While the division of all debts in equitable distribution is important, there are certain debts that play a large role in divorce in North Carolina.
- Credit Card Debt. Credit card debt is a common area of dispute in divorce. If a credit card balance was incurred for a marital benefit, it is likely to be considered a marital debt even if only one spouse’s name appears on the credit card. However, credit card charges related to clearly personal spending, such as gifts for a romantic partner or certain frivolous or extravagant purchase,s may be considered separate debt. Ultimately, each case will require a detailed look at account statements, the nature of charges, and the typical spending of a family to determine whether credit card balances incurred during the marriage are marital debt or a separate debt of the spouse who incurred the debt.
- Mortgages. Generally, if a spouse remains in the marital home following divorce, that spouse will be responsible for and be distributed any mortgage, home equity line of credit, and any other loan encumbering the home. In the event the mortgage is held in both parties’ names or only in the spouse who has moved out of the home, then a refinance of the mortgage or payout of the mortgage may be required, depending on the remaining balance owed. Given that refinancing may or may not be financially advantageous, a mortgage associated with a marital home should play a large part in determining whether it is worth it to remain in the marital home.
- Student Loans. Student loans incurred by a spouse prior to the marriage will remain that particular spouse’s separate debt in North Carolina. However, things get more complicated when dealing with a student loan incurred during the marriage and prior to separation. For instance, a student loan incurred early in a marriage for one spouse to obtain a Master’s Degree may very well be considered a marital debt if that degree ended up meaning higher earnings for the benefit of the family for many years of marriage. However, if that same spouse incurred the same debt just before separation and the other spouse has not yet benefited from an increase in earning capacity, then the debt might be considered the separate debt of the spouse incurring the debt.
- Auto Loans. Auto loan debts incurred during the marriage are generally distributed to the spouse receiving the vehicle to which the auto loan is associated. This can sometimes mean the refinancing of the auto loan is necessary, although parties may agree to forego that process in a Separation Agreement.
- Medical Debt. Medical debts incurred for a spouse’s medical care or a child’s medical care during the marriage and prior to separation will almost always be considered marital debts. While such debts may be handled through payment plans, the Judge will typically distribute the responsibility of payment for the entire debt to just one spouse, with that spouse being responsible for payment at such rate as is appropriate per their terms with the creditor.
Protecting Yourself from Marital Debt
While the equitable distribution process will determine who receives what marital debt in a divorce, there are other steps that you need to take to ensure you are protecting yourself. A good starting place in any divorce in North Carolina is to perform a credit check to make sure you are aware of all of the debt listed on your credit report. These reports can serve as a useful tool to not only review your credit score but also to ensure there is no previously unknown debt associated with your credit.
Another important step early in a divorce is to gather documents regarding your marital debt. While your attorney will be able to assist you in obtaining documents, if need be, it helps to have as much data regarding marital debts on the front end of your separation as possible. These statements will often prove valuable when determining the separate versus marital nature of certain debts. For example, having extensive credit card statements can help determine which portion of credit card balances is more appropriately considered separate debt, given the nature of the spending.
Once you separate from your spouse, you will also want to ensure that they are removed as an authorized user on your credit card to avoid any unwanted spending following separation. There may be some circumstances where you and your attorney decide to continue access, but continued access to a credit card is far more rare than common. Similarly, it is generally a good idea to separate joint debt or even close joint credit accounts following separation.
When it comes to actually dividing debts, it is important to keep in mind the limits and powers of Courts and spouses alike in dividing marital and divisible debts. Even though a Court Order or Separation Agreement may distribute debts to parties, the creditor to which the debt is owed is not required to follow such a designation and may still hold one or both spouses liable for the debt. For example, if a spouse is distributed a mortgage held in both parties’ names as part of equitable distribution, the mortgage company will still consider both spouses responsible for payment. This means that the mortgage company could still hold each spouse legally responsible for the debt, and the debt will also appear on both spouses’ credit reports.
One major way to handle third-party creditors is to ensure your final settlement includes a clause requiring the refinancing or assumption of a debt. These types of clauses will typically require the spouse receiving the debt to refinance or assume a debt such that the debt is held only in the name of the spouse who will be responsible thereafter. It may also be helpful to define what will happen if a debt is not properly refinanced to ensure the non-responsible spouse has the debt removed from their credit report. For example, when it comes to homes, a Court Order of Separation Agreement might require the sale of a home to remove a spouse’s name from a debt in the event a refinance does not occur within a specified period.
Another tool to protect yourself from third-party creditors is to include an indemnification clause in your Separation Agreement. An indemnification clause will essentially state that, if the other spouse fails to pay a debt for which they are responsible and a third-party creditor seeks payment from the other non-responsible spouse, the spouse who was responsible shall take steps to protect the non-responsible party, such as paying the debt on their behalf. However, these sorts of clauses are only as good as a party’s ability to actually indemnify another party, so it helps to plan ahead with contingency plans, such as the requirement of the sale of marital assets to cover debt payments, if necessary.
Miller Cushing Holladay’s Approach to Debt Division
At Miller Cushing Holladay, our Charlotte family law attorneys routinely help clients with all aspects of equitable distribution, including debt division. One of our experienced attorneys will first meet with you to determine your goals in property distribution and discuss how we can work to achieve those goals. We will then work with you to meticulously identify, classify, value, and distribute property, including all marital debts and divisible debts. As part of that process, we will work with you as a team to ensure every marital and divisible debt is properly accounted for, as well as that you are not being saddled with any separate debt incurred by your spouse.
This process will involve an in-depth review of your and your spouse’s debts to ensure a proper division of debts. This will entail us reviewing debt statements, such as credit card statements, in detail to properly identify marital debts versus separate debts. We will work as a team with you, given that you will help provide the necessary context to understand what debts incurred during the marriage served a marital purpose and which debts did not.
Our team will work with you to carefully negotiate a property settlement agreement that best addresses your needs and goals in the event your case can be resolved without the need for court. In some cases, this will involve skillfully negotiating a direct settlement with your spouse or their attorney. In other situations, we will attend mediation with you in an attempt to resolve property division and a subsequent Separation Agreement. In the event settlement is not possible, though, we will not shy away from fierce representation of your interests in court.
Why Choose Miller Cushing Holladay for Your Debt-Related Divorce Matters?
The equitable distribution process is one of the most important aspects of any divorce, especially when it comes to dividing marital debts. The way debts are allocated between spouses can have a long-lasting impact on your financial stability and credit for years to come. At Miller Cushing Holladay, our team of experienced family law attorneys brings over 80 years of collective experience to the table. More importantly, our entire practice is dedicated solely to North Carolina divorce and family law matters, meaning that when you hire one of our North Carolina divorce attorneys, you’re working with someone who is well-versed in the financial complexities of divorce.
Experience is essential in the division of debt, not only because of the high financial stakes involved but also due to the often complex and fact-specific nature of the issues. For instance, determining whether a particular debt is marital or separate may require a detailed analysis regarding the purpose for which a debt was incurred and a deep understanding of how similar cases have been decided in North Carolina. Additionally, any final settlement needs to think several steps ahead to ensure steps are being taken to protect you from third-party creditors in the future. These decisions and actions require a nuanced understanding of North Carolina law and how courts weigh various factors when allocating debt.
At our firm, we take pride in working as a team with our clients throughout the debt division process. Whether negotiating a settlement out of court or advocating in court, one of the cornerstones of our practice is open, transparent communication every step of the way. That dialogue begins at the outset of your case as we discuss your goals and identify how those objectives align with an equitable resolution of debt responsibilities. We will review detailed financial documents and create clear summaries that distinguish between separate debt, marital debt, and divisible debt, giving you a full picture of what’s at stake. In addition to helping you understand the legal and financial implications, we always discuss a cost-benefit approach. Rather than simply outlining your legal options, we take the time to discuss the advantages, risks, and long-term impacts of each approach so that you can make informed decisions regarding debt division in your divorce.
Frequently Asked Questions
What is the difference between marital debt and separate debt in North Carolina?
Separate debt includes debts which were incurred prior to marriage, as well as some debts incurred during the marriage, whereas marital debt only includes debts incurred from the time of marriage to the time of separation. When it comes to debts incurred during the marriage, whether a debt is considered separate or marital will depend on whether the debt served a joint benefit. If the debt did provide a marital debt, then it will be considered a marital debt, whereas debts that were not incurred for a marital benefit will be considered a separate debt.
Will all our joint credit card debt be split 50/50 in a North Carolina divorce?
Credit cards will generally, but not always, be distributed to the party whose name is associated with the debt. However, this distribution of debt will be taken into consideration in other areas of equitable distribution. For example, if a party receives substantially more debt, they might also receive substantially more assets to compensate for such in a final distribution of property. While Courts are not required to divide property equally, that is generally the goal and the outcome in many cases. Assuming an equal division is the desired outcome, assets and debts are both considered together to ensure each part receives the same net amount of funds, regardless of whether one spouse ends up with more debt than the other.
If my name isn’t on a debt, can I still be responsible for it in an NC divorce?
Yes, you can still be responsible for a debt even if it is not in your name. In North Carolina, whether a debt will be considered marital and thus distributed in equitable distribution depends on whether the debt was incurred following your date of marriage and prior to your separation, and also was incurred for a marital benefit. If the debt meets both of these requirements, then the debt will be considered marital regardless of how it was titled during the marriage. In some instances, this could mean that you are distributing the debt following a divorce. For example, you may be required to pay the mortgage for the marital home if you receive the marital home as an asset, even if your name was not originally on the mortgage. However, in other instances, the debt may still be distributed to your spouse with the understanding that they might receive similar assets to compensate for them taking on future responsibility of the debt.
What happens to our mortgage debt if one spouse keeps the house?
When one spouse receives the house, the mortgage will generally become their responsibility moving forward. This often means that the spouse will need to assume responsibility for the mortgage, such that they are the only party liable to the mortgage company. In some instances, this will mean that the spouse retaining possession of the home will need to refinance or assume the mortgage in order to ensure it is in their sole name.
Are student loans always considered separate debt in a North Carolina divorce?
No, student loans are not always considered separate debt in North Carolina. The first important question when assessing whether a student loan is a separate debt or marital debt is to determine when the loan was acquired. If the loan was incurred before marriage, then it will remain the separate debt of the party who took out the loan. However, if the debt was acquired during the marriage, then it will be considered a marital debt if it was incurred for a marital benefit or a separate debt if no marital benefit resulted from the debt. The determination of whether a marital benefit resulted is a case-by-case analysis that depends on the timing of the debt in the marriage, the length of the marriage, any increases to career potential and the timing of the same, and numerous other factors.
What can I do to protect my credit score during or after a divorce involving debt?
First, it is important to check your credit score and your entire credit history when going through a divorce. This will help you better understand your score, but also ensure there are no previously unknown debts associated with your credit. The next step is to properly identify and classify all debt held by you and your spouse before dividing the debt. When it comes to dividing debt, it is important to handle contingencies for the future to ensure proper payment of debts following divorce. For example, if your name is on the mortgage, but your spouse will be remaining in the house, then you will want to ensure your spouse either refinances or assumes the mortgage to protect your credit thereafter.
Can the court make my ex-spouse pay the debt that was solely in my name?
Yes, a Judge may order your ex-spouse to pay a debt that was in your sole name if the debt is a marital or divisible debt. However, just because that spouse is ordered to pay the debt in your name does not mean the creditor for that debt will not try to hold you responsible if payment is not made. Given the risks involved with creditors, it is important to make plans for the payment of a debt in your name by your ex-spouse, including potentially having them refinance or assume the debt, and including indemnity clauses in your final Court Order or Separation Agreement for debt division.
What if my spouse accrued significant debt without my knowledge during the marriage?
Whether or not the debt incurred by your spouse is considered marital debt will hinge on whether the debt was incurred for a marital benefit. For example, if the debt was incurred to cover routine and standard living expenses, then it could be considered marital even if you were not aware of the debt beforehand. However, if the debt was incurred for your spouse’s sole benefit, then it could be considered separate and will remain their sole liability. However, even if a debt is considered marital, that does not necessarily mean you will be saddled with that debt following separation. Rather, it is more likely that your spouse will still be responsible for payment of the debt, although they may receive additional assets to compensate for the same.
