Personal Loans and Credit Cards: Dividing Debt in a Divorce

Divorce can be stressful especially when there are issues of debts such as personal loans and credit cards. In this post, I’ll discuss the issue of divorce and the division of debt.

Key points:

• A personal loan can help with debt consolidation.
• In a divorce case, one spouse could still be responsible for the debt even if the debt is not in their name.
• Courts are known as courts of equity.

What is a Personal Loan?

In a prior post, I explained how a personal loan help me improve my credit score. It was at a time when I had bad credit, and that was one of the first steps I took. The interest rate on my personal loan was low, so it was the right decision to make at the time.

• How I Used a Personal Loan to Improve My Credit Score

I’ve received three personal loans that I remember in my life. The first time was, as I mentioned, to improve my credit score. The second time was during the COVID-19 pandemic when I was concerned about the effects of the pandemic on my law practice, so I got a personal loan for a just-in-case scenario. The last time was about a year ago when I borrowed $15,000 to build a steel garage on my property.

Once I pay off my current personal loan, I’ll probably apply for another to pay off my taxes owed to the IRS. Currently, what I pay the IRS isn’t listed on my credit report, but I am paying interest as well. I might as well get a loan that gets reported to the credit bureau as long as the payments remain the same and the interest rate is similar.

Personal Loans and Divorces

After handling divorce cases for more than two decades in Florida and having developed the family law course where I taught law school, I speak from experience that married couples tend to believe that what is in their name is theirs or their responsibility. But that is not the case. So, even if the debt is in your spouse’s name, you could be responsible for it in a divorce case.

The general rule is that any increase in debt during the marriage is the responsibility of both spouses. Notice I said, “during the marriage.” It’s common for spouses to get married these days already with debt, such as credit cards, student loans, personal loans, or even mortgages.

For example, you get married and have $1,000 in credit card debt that was before you got married or premarital. When you get divorced, the balance on that credit card is now $10,000, so during the marriage, the credit card debt increases by $9,000 dollars. That $9,000 increase is split, so each spouse is responsible for $4,500. You can apply that formula across the board for all types of debts, whether personal loans or credit cards, and even for an IRA or 401k loan. The same formula applies to assets.

Paying Your Divorce Lawyer with a Personal Loan

The portion of the asset, or in this case debt, that was premarital stays premarital. So, when it comes to the law in divorce court, the law is not simply looking at the title or whose name is on the asset or debt. If it did, you can imagine the unfairness in certain situations. The following example illustrates that point.

One spouse is a stay-at-home parent, and because the spouse stayed at home in order to take care and raise the children, the other parent worked and accumulated assets in their name. That would mean that at divorce, the stay-at-home parent would get nothing while the working spouse walks away with everything. But let’s add to that fact pattern.

Say the stay-at-home parent has three credit cards solely in their name. If the law only looked at whose name was on the debt, then that means the stay-at-home parent would not only walk away with no assets that were accumulated during the marriage but also take with them debt. If that is the way divorce law works, trust me, no one would get married.

Equitable is not Equal

That, of course, doesn’t sound logical or fair to anyone. It’s not fair because it’s simply not equitable. That’s the keyword to focus on: “equitable.” In this case, it would only be fair or equitable that the stay-at-home parent would also be entitled to the assets accumulated during the marriage and also have the debt shared equally. So, let’s discuss briefly premarital assets.

How Bankruptcy Influences Divorce Settlements

Let’s say that Bob and Jane got married. Bob owns the house from before the marriage, and after a few years of being married to Jane, he files for divorce. Is it fair for Jane to come in and take away half of Bob’s house even though they were only married for five years and Bob owned the home for 10 years before getting married? That wouldn’t be fair at all, either. It’s not equitable, and courts are known as courts of equity.

Going back to the issue of personal loans, now you see how this situation applies in a divorce and both parties might be responsible for the debt that was accumulated during the marriage even though the debt is in the name of the other spouse. Of course, this assumes all things are equal, meaning there are no other issues at play, such as other assets to divide, where credits might be issued, financial fraud, or alimony issues where debt is paid by one spouse as a form of alimony.

I hope this blog post helped you understand how one party can be responsible for some, if not all, of the debt in a divorce case, including personal loans, even though their name is not listed on the loan.

Do you have any questions you wish to ask regarding personal loans? Then feel free to send me an email at alex@bankruptcy.blog.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. For paralegals and students buying single copies, you can do so via Amazon books. To access my YouTube channel, click this link.

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Updated on January 11, 2025 for additional links.