YouTube- Personal Loans and Divorce

In my latest YouTube video, I’ll discuss issues with debts such as a personal loan and divorce, including issues of equitable distribution. You can see the video below or directly via my YouTube Channel via this link.

Who Pays for the Personal Loan in a Divorce?

In a divorce, both spouses might be responsible for a personal loan, even if only one spouse’s name is on it.  This applies to debts accumulated during the marriage, even premarital debt, to the extent that it increases during the marriage.

What You Need to Know About Debt and Divorce

Many couples mistakenly believe that only debts in their name are their responsibility. However, in most states, any increase in debt during the marriage is considered marital debt and can be divided into a divorce.

For example, suppose you bring $1,000 in credit card debt into the marriage (premarital debt). During the marriage, the balance increases to $10,000. The $9,000 increase is considered marital debt and could be split 50/50 in a divorce. The same formula would apply to assets.

Fairness and Equity in Debt Division

Courts are known as courts of equity, which means they aim for an equitable distribution of assets and debts. That’s why I always tell my clients that equitable doesn’t necessarily mean equal. For example, consider a stay-at-home spouse with credit card debt while the working spouse accumulates assets. The working spouse has poor credit while the stay-at-home spouse has excellent credit. Only looking at whose name is on the debt wouldn’t be fair because the non-working spouse would be stuck with all the bills and receive none of the assets.

You can see how in that scenario, that could easily lead to fraud by having one spouse avoiding having credit in their name, leaving the other spouse responsible for all the debt.

Premarital Assets Remain Separate

If you owned a house before marriage, your spouse wouldn’t be entitled to half of it after a short marriage. That wouldn’t be “equitable.” So it’s not 50/50 like people tend to believe, and that includes community property states. However, there would be an interest in equity appreciation during the marriage. We can use the same formula as discussed above.

• YouTube Video Post: Divorce and Bankruptcy Issues

For example, suppose one spouse used pre-marital funds as a down payment to buy the marital home. When the parties get divorced, there is $100k in equity. If all things were equal, that would be $50,000 each. But it wouldn’t be fair or equitable in that example that both parties walk out with the same amount because one spouse used premarital funds for a down payment. Without that down payment, the mortgage balance would be higher. The monthly payments would be higher. It’s even possible they wouldn’t even qualify for the mortgage without the deposit.

So, if the spouse used $20k premarital funds as a deposit, that is returned. So instead of splitting $100k, now $80 is divided equally. So, the spouse gets their initial deposit returned of $20k, plus $40k for each spouse.

Personal Loans During a Marriage

Now, let’s connect this to personal loans.  If you took out a personal loan during the marriage, both spouses might be responsible for some or all of it in a divorce settlement.

The Impact of Rising Interest Rates on Divorces and Mortgages

That, of course, depends on if there are spousal support issues involved. But for the most part, we can assume it will be split equally. Remember, whose name the debt is in doesn’t matter. Common sense is if the parties are considering a personal loan to consolidate their debt, but one spouse is being offered the loan at 24% interest and the other at 12%, it’s common sense to go with the lower amount. At divorce, chances are they are both liable for that loan.

I hope this helps explain the issue of marital debt and divorce, and the legal concept of equitable distribution. Feel free to like and subscribe to my YouTube Channel.

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.

Need to look for prior blog posts or other categories? Click the links below:

• Bankruptcy
• Your Wallet

This blog post and video provide a general overview.  For specific legal guidance regarding your situation, consult with a divorce lawyer.