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Debt and Marriage | Is My Spouse Responsible?

3 wife and husband cryingMarriages are (contracts) made in heaven or so they say, but not every couple in the US is bound together for all eternity.

Some couples sign pre-nuptial agreements, to pre-empt any misunderstandings that might stem if their marriage fails in the future.

While this might seem clinical, it is a good decision.

Marriages are social contracts. However unromantic or legal it may sound – bringing along happiness, responsibility and in some instances, a fair share of debt at times! In fact, 7 out of 10 Americans enter into marriage with debt, according to debt.org.

Whether you’re just into a relationship or have been married for decades, debt can put stress on both of you individually plus on your marriage as well. Stress from being in debt can often lead to arguments, feelings of resentment, anger, and blame, and can really take a toll on your time together.

 

The trouble is that many people consider money a tougher topic to discuss than even politics or religion, a report by Wells Fargo concluded.

Regardless of where you are in your relationship, it’s always a good time to sit down and have an open conversation about debt. Open conversations always pave way for stronger and healthier relationships in general as well.

 

While you generally can avoid inheriting your spouse’s debt when you get married, you may be responsible for it going forward. How the debt is titled and whether you live in a common law or a community property state are key considerations for determining who is responsible for a debt.

Community Property States – Spouse debt prior to marriage

There are only nine community property states:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

However, their laws regarding spousal debt are significantly different from the common law states. While you are not responsible for any pre-marital debt incurred by your spouse in a community property state, you are jointly responsible for debt incurred by either spouse going forward.

Even if your spouse opens a credit card in his name, you will be responsible for repayment of that debt under community property law.

However, community property law does allow you to sign an agreement with your spouse stating that your debts are to be treated separately.
Debts

In community property states, most debts incurred by either spouse during the marriage are owed by the “community” (the couple), even if only one spouse signed the paperwork for a debt. The key here is during the marriage. So if you incur a debt, such as a student loan, while you’re single, and then get married, it won’t automatically become a joint debt. (An exception is where a spouse signs on to an account as a joint account holder after getting married.)

Some states, like Texas, have a more nuanced way of analyzing who owes what debts, by evaluating who incurred the debt, for what purpose, and when.

How does one remove a spouse’s liability?

Couples in community property states can sign an agreement with each other to have their debts and income treated separately. Signing a pre- or postnuptial agreement like this can make sense for a couple before one spouse goes into business. (But if you’re already in business, signing an agreement now won’t protect your spouse from liability for business debts that you already owe, only from liability for future business debts.)

You can also sign an agreement with a particular store, lender, or supplier, stating that the creditor will look solely to your separate property for repayment of any debt, essentially removing your spouse’s liability for any obligation or debt from the contract – if you can get the other party to agree.

What do the Common Law States have to say on pre-marital debt ?

Wedding walk
Wedding walk

The states that do not observe community property laws are known as the common law states. In a common law state, you are not liable for your spouse’s debt before marriage, and you can avoid responsibility for your spouse’s debt after marriage.

Common law holds that the only the person whose name is on the debt is liable for its repayment. An exception of this is considered if the debt was incurred for joint household expenses, such as food, clothing, shelter, education or child care.

Credit Reports – Spouse credit card debt

A credit report is an individual report, never a joint report. After you get married, you and your spouse will continue to maintain individual credit histories.

However, if your spouse has bad credit, it may end up affecting you. Any time you apply for a joint loan, be it for a credit card, a car loan or a home mortgage, your spouse’s credit history will be examined alongside yours. If your spouse has a poor credit history, you may end up being denied a loan or granted one with a high interest rate, even if you have a spotless credit history.

 

A Quick comparison of a few points under Community Property state and Common law property state:

Question Community property state Common law property state
What property can be taken to pay debts?

 

Creditors of one spouse can go after the assets and income of the married couple to make good on joint debts (and remember, in a community property state, most debts incurred during marriage are considered joint debts).

As to one spouse’s separate debt, such as one spouse’s child support obligation from a prior relationship, or a debt in one spouse’s name only where the spouse hid the fact that he or she was married, a creditor can go after only that spouse’s half of the community property to repay the debt.

Creditors of one spouse can go after the income or property of the other spouse — or joint property — only if the debt was incurred for joint purchases or for purchases that were made for family necessities.

In some common law states, a creditor can also go after joint property to pay the separate debts of one spouse (even if the debt was not family-related), but in most states a creditor can take only half of the money in a joint account.

Income & Property In community property states, a couple’s income is shared as well. All income earned by either spouse during marriage, as well as property bought with that income, is community property, owned equally by husband and wife.

Gifts and inheritances received by one spouse, as well as separate property owned before marriage that’s kept separate, are the separate property of one spouse. All income or property acquired before or after a divorce or permanent separation is also separate.

 

Generally,  income earned by one spouse during the marriage belongs to that spouse alone, if it is kept separate. And any property bought with separate income or funds during the marriage is also separate property (unless the title to the property is put under both spouses’ names).

In addition, gifts and inheritances received by one spouse, as well as property owned by one spouse before marriage (and kept separate), are the separate property of that spouse.

However, if income earned by one spouse is put into a joint bank account, that income or property becomes joint property.If joint funds are used to buy property,the property is also owned jointly(unless title is taken in the name of one spouse only).

Jointly owned property can include equity in a jointly owned house, household goods, jointly owned vehicles, and jointly owned bank accounts, retirement plans, and stocks or mutual funds.

For property that has a title document,such as real estate and vehicles, whose name is on the title indicates who owns the property in common law property states.

For instance, if a car is in only one spouse’s name, it’s considered that spouse’s separate property. If a house is in both spouses’ names, the house is joint property, even if one spouse doesn’t contribute anything toward the mortgage payments

Joint Accounts

If you open a joint account with your spouse, you are accepting liability for that debt regardless of whether you live in a common law or community property state. This holds well even if you do not ever personally use the account. Any time you sign an agreement to pay a debt, even electronically, you become responsible for the debt.

Say, you can inherit pre-wedding debt if you sign on to your spouse’s existing account as a joint holder. Consolidating your pre- and post-wedding debt or refinancing the debt together under joint names are also ways of taking on your spouse’s pre-marital debt.

Spouse Responsibility – spouse should guarantee your business debts? It follows that if you live in a common law state and you own a business that your spouse is not involved with, you don’t want your spouse to personally guarantee any of your business debts. Unless your spouse cosigns a loan or personal guarantee, your spouse won’t be liable for your business debts — if you keep your money and property separate.

Is your Spouse responsible for your debt after your death??

In most cases, you will not be held responsible for your deceased spouses’ debts; unless you have co-signed the loan or credit agreement or if you live in a community property state.

What to do before the debt piles up?

  • Get organized – list out every financial concern and source of debt to be addressed
  • Get educated about your financial situation and the legal matters that surround them.
  • Ask yourself if you have co-signed for credit cards having outstanding bills and if you live in a Community Property state
  • Seek professional guidance if required

 

How to make it through the debt?

It is disheartening to know how 45% of marriages end in divorce, according to Rutgers University professor David Popenoe. And yes, the number one cause of divorce is financial disagreements, according to Charles and Elizabeth Schmitz, co-authors of “Building a Love that Lasts: The Seven Secrets of Successful Marriage.”

 

These are some of the ways you can work together through your debts

  • Communicate regularly about financial issues
  • Think for a minute before you speak about financial matters as studies show that financial matters related discussions spark about three arguments per month
  • You and your spouse are a team. Remember that. Make a plan and help each other stick to it
  • Get the basics right. You need to differentiate between needs and wants
  • Get to the root cause of the problem that you’re facing. You sometimes get tangled deep and you need to work your way back to where and how it all would have started to gain clarity.

 

3 couple looking at the billsMerging finances – how to?

Couples tend to face a lot of money issues post marriage ranging from over spending to building up volumes of debt. There should be a separate yet equal approach to manage your finances post marriage.

– We’re all equal here approach : keeping all your accounts separate, and having just one joint account for common expenses and both the spouses making an equal contribution towards the same.

Pick your bill approach:Each person picks certain bills and expenses to pay for. These may not necessarily be equal.

Act as If Approach: Living on one income and saving the rest, though both partners are employed.

What’s Mine Is Yours Approach: Combining finances completely; applicable for married couples who don’t enter the marriage with significant separate assets.

Don’t let debt be the number one issue in your marriage. Your dealings with debt should not necessarily mean that you stop having fun together.

Take time to not talk about money as well. Find things you can do together to reduce stress and enjoy your marriage and you’re more likely to stay on track with your debt repayment plan.

 

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