What Happens to Loans During a Divorce
There is not a single answer to what happens to loans during divorce & marital debts when spouses divorce. Whether loans or debts are divided and how they are divided depends on the contracts regarding the debts. The court will consider the length of the marriage, whether both parties benefited from the debts, and each party’s ability to repay the debts.
Generally, debts are marital property in an uncontested divorce in Madison County or anywhere else in Alabama. Debts acquired before the marriage must be repaid by the person who incurred them. Debts acquired during the marriage must be repaid by both parties. There are exceptions to these rules.
If a spouse signs a contract that names them as a surety, meaning a person who promises to be liable for the debt of another, the surety becomes liable for the debt. A spouse may also become liable if they cosigned for the debt initially, even if the parties were not married.
When a married person incurs a debt during the marriage, the court will look at communications relating to the debt and the contract for the debt to determine how to handle the loans during the divorce. The court will examine if both spouses’ signatures are on the contract. The court will also ask whether there is any evidence of fraud, undue influence, or duress.
Fraud means that someone was dishonest about the terms of the debt and the nature of the contract for it. Undue influence means that one party exerted a significant amount of pressure on the other to get them to sign for the debt. For example, if a spouse said they would not care for the couple’s child unless their partner signed for the debt, this would be considered undue influence. Duress means that one party threatened to harm or actually harmed the other to get them to sign for the debt in the uncontested or cheap divorce in Jefferson County, Alabama.
If a spouse’s signature is absent, the court will determine if there are communications that prove this spouse was intended to or did intend to cosign for the debt or be a surety for the debtor. This is one consideration for handling loans during a divorce in Alabama.
If a person took on a debt in secret during the marriage, hiding it from their spouse, the court in a Calhoun County divorce may find it inequitable for their spouse to be liable for the debt. The exception is if the spouse or a family business in which the spouse took part benefited from the debt. Under these circumstances, the court may find that the spouse might bear some or half the responsibility of repaying the debt.
Even though debts incurred during the marriage are usually community property, one spouse’s credit card debt does not automatically become the debt of the other spouse.
If the debts are for state or federal taxes, the court will look at how the spouses filed their taxes. A married couple can elect the tax status of “married filing separately” to have incomes, exemptions, and deductions on separate tax returns. If one person declares personal bankruptcy, the other spouse does not automatically become liable for paying their debts. A married couple can file for personal bankruptcy in Alabaster or anywhere else in Alabama jointly or as individuals.
After bankruptcy, creditors may attempt to collect from the spouse who did not incur the debt. The creditors may be unable to do this unless the spouse who was not responsible began paying the debt. Further, the creditors may be unable to collect on the debt if the statute of limitations for failure to repay has expired.
In Alabama, different types of debts have different statutes of limitations. Common statutes of limitations include:
- Alabama state taxes: 10 years
- Federal taxes: 10 years, generally
- Mortgage debt: 6 years
- Medical debt: 6 years
- Credit card debt: 3 years
- Auto loan debt: 4 years
It is important for a spouse who is not named in debt documents to ask their divorce and/or Birmingham bankruptcy attorney whether they have to repay their partner’s debt before they make a payment. A spouse who did not sign paperwork should be wary of signing paperwork that would make them a cosigner or surety.
Attorney Steven A. Harris regularly blogs in the areas of family law, bankruptcy, and real estate closings on this website. He is always available in any of the firm’s offices or by phone anytime for a consultation. Mr. Harris tries to provide informative information to the public in easily digestible formats. Hopefully you enjoyed this article and feel free to supply any feedback. We appreciate our readers and love to hear from you!
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