“What’s yours is mine and what’s mine is yours” is a typical mantra of married couples. But when it comes to debt, that saying can be scary. Fortunately, the general rule is that spouses are not responsible for each other’s debts (in the legal sense, of course). Therefore, when agreeing to assume a liability, the borrower’s spouse can usually rest assured he or she will not be held responsible if the borrower is unable to meet his or her obligations.
There are caveats to this general rule, however. Below, you’ll find an overview of the legal intricacies and potential pitfalls associated with spousal debt, as well as situations where you may need to be prepared to take on liability.
Community Property States
If you and your spouse reside in a community property state, your debts are likely to be considered owed by both of you, regardless of who signed for the loan. As of 2019, there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. A few important rules apply in these states for student loans in particular:
- Federal student loans: If you or your spouse take out a federal student loan after getting married, the debt will likely remain the responsibility of the borrower, regardless of the state you live in.
- Private student loans: Married borrowers should be far more careful when taking out private student loans, as these loans are more likely to be subject to community property legal standards.
- Loans incurred before marriage: If you or your spouse incurred your student debt before entering the marriage, joint liability would likely not attach to the loans, regardless of whether they’re federal or private.
Liability and Joint Debt
You may run into situations where you have unwittingly assumed liability for the debt of your spouse. If you cosigned a loan with your spouse, then you may have assumed liability for the debt if your spouse is unable to pay. In that case, if your spouse completely discharges the debt in bankruptcy, the creditor could pursue legal action against you to recover the debt. This is the primary reason you should avoid cosigning for your spouse’s debt whenever possible.
In addition, if you and your spouse decide to enter into a joint debt, then, typically, you both are “joint and severally liable” for the spousal debt—meaning the creditor can come after one or both of you for the full amount owed.
If enabling joint use of a credit card is the goal, consider appointing one of you as the primary cardholder and the other as an authorized user of the account. An authorized user has no liability for the debt associated with the account but has the authority to make purchases and have his or her own card. While both spouses typically do not need to sign to be liable on a debt (other than for a home mortgage), it is sometimes necessary to increase a credit limit or in cases where one spouse is unable to obtain the credit on his or her own. In such cases, the cosigner must consider whether it is necessary to obtain the credit and fully understands the implications of his or her signature.
Student Loan Repayment
If you are looking into federal income-based student loan repayment options, be aware your spouse’s signature is usually required. Your spouse should be sure to carefully read anything he or she signs related to a loan, but, typically, the lender requires a spouse’s signature for verification of income purposes only, not to impose liability upon the spouse for the debt.
When finalizing a divorce, a judge can order the split of not only the marital assets but also the debts of the parties. Generally, if a spouse has incurred a debt individually, that debt will remain with the person who incurred it; however, the judge may award assets disproportionately to the individual with the higher indebtedness if the judge determines fairness demands it or that the debt was incurred to benefit the marital household. In the case of joint debt, a judge can order that only one spouse is responsible for the debt, notwithstanding that both spouses are legally liable to the creditor.
Creditors are not bound by the terms of a divorce decree and are free to pursue an individual for a debt that a judge has ordered the individual’s former spouse to pay. If a spouse was ordered by a judge to pay a joint debt, however, and then files for bankruptcy, the bankrupt spouse is typically unable to discharge his or her obligation to the former spouse to satisfy the debt.
The More You Know
The combination of marriage and debt can become complicated. But understanding the rules regarding spousal debt and any potential liability you may face can make navigating these situations that much easier. As always, whether you’re going through a divorce, trying to manage student loans, or dealing with all of the above, your financial advisor is available to help you make the best choice for your circumstances.
As a guest blogger, I'm unable to respond directly to comments posted below, but if you have any questions, please feel free to contact me directly and I would be happy to help!
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Kristen Smith is a guest blogger, representing Axial Financial Group in Burlington, MA. She offers securities as a Registered Representative of Commonwealth Financial Network, Member FINRA/SIPC. CRR, LLP (also represented as CRR, CRR CPA), Axial Financial Group, and Commonwealth Financial Network are separate and unrelated entities. Kristen can be reached at 781-273-1400 or email@example.com. This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer.