Dealing With Debt

Don't assume that a divorce will erase any debt. If you live in a community property state, debt -- like your assets -- will be split down the middle. You will be responsible for half of all debt in jointly held accounts and, in some cases, for half of a spouse's individual debt as well.

If you don't live in a community property state, you remain responsible for your individual debt (but not your spouse's) and any debt in jointly held accounts. One important trap to avoid is maintaining joint accounts after the divorce. Your spouse could continue running up expenses and leave you with the debt. As soon as the divorce is finalized, freeze all joint accounts and have your creditors reclassify them as individual accounts. Most creditors will do this at your request, though they are not legally required to do so. To protect your credit rating, make sure to keep up with monthly payments.

In addition, include the payment of debt as part of the settlement. Take on the responsibility for the debt yourself, if necessary, and take a share of the assets to pay the debt down.

If you and your spouse own a home that has appreciated in value, you may want to sell it before the divorce is finalized. Federal tax rules offer an exclusion of up to $500,000 in realized capital gains for married taxpayers. This amount is cut in half for single filers. Be sure to consult a tax advisor for additional information about these rules.
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