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Divorce and remarriage can raise questions about how debt is divided and managed between former and new partners. In most cases, debt acquired during a marriage is considered marital debt and may be divided during the divorce process, depending on state laws. However, debt brought into a remarriage typically remains the responsibility of the individual who incurred it unless otherwise agreed.
A financial advisor can help you understand how debt can be affected by divorce and marriage, and create a plan to restructure your finances.
Where you get divorced is an important consideration when studying how debt will be affected. That’s because the process of splitting debt can vary significantly depending on whether you live in a community property state or a common law state.
Generally speaking, in community property states, any debts incurred during the marriage are considered joint debts, meaning both spouses are equally responsible for them. For example, even if only one spouse signed for a loan or credit card, both may be liable for the debt.
Comparatively, in common law states, debts are typically assigned to the individual who incurred them. That is, if one partner borrowed money to buy a car, only that partner is responsible for paying off the loan. An exception occurs when both parties are co-signers to a credit arrangement.
Here’s a table showing whether states use the community property or common law systems:
Community Property States
Common Law States
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin
Alabama, Alaska*, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia and Wyoming
*Alaska allows couples to opt into a community property arrangement if they agree in writing
In community property states, the law views most debts acquired during the marriage as shared responsibilities. This approach can simplify the division process, as debts are typically split down the middle.
However, it may also lead to complications if one spouse was significantly more responsible for accruing debt. This can be true even if one partner took on a debt without the other’s knowledge. In that situation, both may be held accountable for a debt solely incurred by one partner.
In common law states, the division of debt is more individualized. Debts are generally assigned to the spouse who incurred them, which can lead to a more equitable distribution based on each person’s financial behavior during the marriage.
Partners may still share the obligation to pay off some debts, however. For example, if both of their names are on a joint credit card, they may both be held responsible.
A divorced couple discussing debt repayment strategies.
After a divorce, understanding how debt is handled becomes even more relevant if you plan to remarry. Any debt that remains from a previous marriage can have a noteworthy impact on your new financial situation, especially if it includes large balances or ongoing payment obligations.
The good news is that debts acquired during a previous marriage generally remain the responsibility of the individual who incurred them. However, they can still affect a remarried couple’s joint financial planning.
Clearing or managing outstanding debts before remarriage can help avoid potential conflicts. Debts like unpaid credit card balances, student loans or spousal support obligations may limit your ability to contribute fully to new shared financial goals.
If full repayment isn’t feasible, creating a repayment plan can demonstrate financial responsibility to your new spouse. No matter which solution is employed, addressing these issues early ensures clarity and reduces stress.
Openly discussing financial histories with a future spouse establishes a foundation of trust. This includes disclosing any remaining debts and repayment plans, as well as discussing how new financial obligations will be handled.
A prenuptial agreement may be useful here. One of these contracts can help define responsibility for pre-existing debts and prevent these liabilities from becoming a shared burden.
When remarried couples combine finances, pre-existing debts can indirectly affect both partners even if only one partner bears the responsibility for paying them. For example, joint applications for loans or mortgages may be impacted by one spouse’s credit history.
Some couples keep a portion of their finances separate by, for instance, maintaining individual accounts for repaying old debts. Similar moves can help manage these complexities while protecting new shared assets.
Taxes can play an important role in managing debt during divorce and remarriage. Understanding the tax implications of debt division and repayment is essential for effective financial planning. Here are five common tax situations to consider:
Debt and tax deductions in divorce: Certain types of debt, such as mortgages or business loans, may come with tax-deductible interest payments. When these debts are divided during a divorce, it’s important to clarify who can claim these deductions moving forward. For example, the spouse who continues making payments on a mortgage may also claim the related deductions, but this should be specified in the divorce settlement.
Alimony and taxes: Alimony payments, which may be required as part of a divorce agreement, can also impact taxes. For divorces finalized before 2019, alimony payments are deductible for the payer and taxable for the recipient. However, for divorces finalized in 2019 or later, these payments are no longer deductible or considered taxable income under federal law. This change can influence debt repayment plans and overall tax strategies.
Debt forgiveness and taxes: If any debt is forgiven as part of a divorce settlement, the IRS may treat the canceled amount as taxable income for the person who benefits from the forgiveness. This can create unexpected tax liabilities, so it’s important to review settlement terms carefully and consult a financial advisor or tax professional.
Taxes and remarriage: When remarrying, couples should also consider how taxes will impact joint financial planning. Pre-existing debts from a prior marriage may affect tax filing decisions, including whether to file jointly or separately. Filing jointly can sometimes lower tax liabilities, but it may also expose the new spouse’s income to risks associated with old debts, such as garnishments or liens.
Financial planning with taxes in mind: A financial advisor can help navigate tax-related challenges when dividing or repaying debts during divorce or remarriage. They can also assist in creating strategies to manage tax obligations, optimize deductions, and protect new assets as couples build their financial future together.
A divorced couple reviewing their finances.
Managing debt during divorce and remarriage requires a clear understanding of state laws, open communication and careful planning. Whether dealing with debts in a community property or common law state, or handling debts from before a marriage, being open and taking early action can help avoid financial misunderstandings and stress. By tackling existing debts, sharing financial backgrounds, and thinking about using legal agreements like prenups, you can create a strong financial base and build trust in a new relationship.
A financial advisor can help you create and adjust a financial plan for different life events. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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