The possibility of taking on a partner's debt is a significant financial concern for many couples thinking about marriage. Common sources of debt could include anything from unpaid taxes to credit card debt to missed student loan or mortgage payments. In this blog, we will discuss the instances in which you might be at risk for your spouse's debt and how to prevent it from becoming a source of stress in the relationship.
Does getting married make you responsible for your spouse's debt?
Marriage doesn't automatically make you responsible for your partner's debt. It depends on who originally took out the debt. Furthermore:
- If you took out the debt in your own name prior to your marriage, this debt remains your sole responsibility. For example, if you took out a $35,000 car loan two years before you got married, this debt wouldn't become your partner's debt. Your spouse would only become responsible if he or she co-signed with you on the car loan while dating. If that is the case, then half of the loan is your spouse's responsibility.
- When you are married and decide to make certain financial moves together, like purchasing a home or starting a personal retirement account, those shares, debts, and assets are shared equally. When you are married, you will co-sign or open a joint account that includes both of your names. For example, if you and your spouse co-sign on a rental property for $450,000, you would be responsible for half of the debt. In short, as long as both partners' names are on an account, they will share equal responsibility for any debts or benefits that come from it.
Debt incurred during marriage: Common law states vs. community property state
Whether you and your spouse will have to split the debt that's only in one of your names after marriage largely depends on the laws in the state in which you reside. Keep reading to learn more about the two types of property law states.
- Common Law States: Common law views any debt or assets acquired by only one person during marriage to belong solely to that person. The only exception is if both names are on that debt. For example, if you decide to take out a credit card in your name only and have a balance of $10,000, this debt will remain 100% your sole responsibility after marriage, and even after divorce. The only exception to this is if the debts in that person's name benefited both partners. For example, a mortgage is a type of debt that may benefit both partners if they both live in the property.
- Community Property States: Community Property laws view any debt or assets acquired by only one person during marriage as belonging to both partners. This makes it so that if your spouse takes out debt without you knowing, you will be responsible for half of the debt if you were to get a divorce. For example, if your spouse takes out a car loan in his name for business and you get a divorce, half of the car loan will become your responsibility.
There are 41 Common Law states:
- New Hampshire
- New Jersey
- New York
- North Carolina
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
There are 9 Community Property States:
- New Mexico
What happens if your spouse has back-owed taxes to the IRS?
If your spouse owes money to the IRS, the tax debt becomes your responsibility if you file taxes jointly as a married couple. When you file your taxes jointly, you are essentially making a promise to the IRS that you know the accuracy and completeness of the entirety of your tax return. If your spouse owes money in taxes and you don't know, you could become responsible. However, some laws protect spouses from this, and you could qualify for the Innocent Spouse Relief. If you are in this situation, the IRS website has details on how to request spousal tax relief.
Financial and personal consequences of debt in marriage
In some situations, debt in a marriage can negatively impact your finances and even your personal relationship.
- Financial Consequences: If an account that you co-signed or are the joint owner of with your spouse becomes past due, your credit score can be negatively impacted.
- Personal Consequences: According to a recent study, nearly one-quarter of couples in the U.S. reported keeping financial secrets from one another. Not only can debt in a marriage cause financial issues, but it can also impact your emotional relationship. These types of feelings can cause couples to resent each other or fear the other person.
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Understanding pre-nuptial agreements
Prenuptial agreements are a good way to bring up finances and protect yourself. When you create a prenuptial agreement, you have to discuss all aspects of each other's finances and decide together what should happen with your finances if you were to get a divorce. If one person has more debt and another has more assets. The person with the assets may want to protect what was there prior to the marriage. The couple may agree that those assets will all go to that person if there is a divorce instead of splitting it equally.
Prenuptial agreements can cover a wide range of topics, from property and asset division to spousal support and inheritance rights. Decide together what you want to include in your agreement. You should plan to hire your own attorney in order to ensure that your interests are equally represented.
If you and your spouse are going through a divorce and there is debt in the equation, you may be stuck with debt you do not want. Any debts that occurred during the marriage could be divided equally, even if they aren't in your name.
If you live in a common-law state and don't have a prenup, a divorce court would rule on how the debt is split. Usually, courts follow an equitable distribution rule, meaning you could be stuck with more debt than you were.
How to tackle debt as a couple
If you and your spouse have debt, it's important to start tackling your debt together. Here are a realistic steps you can take to pay off your debt.
- Set financial goals: Start by discussing your financial goals as a couple and create a budget that aligns with those goals. This could include paying off debt, saving for a down payment on a house, or planning for retirement.
- Review your debts: Take a thorough inventory of all the debts that you and your spouse have, including the amount owed, interest rates, and minimum monthly payments.
- Create a debt repayment plan: Determine the order in which you will tackle your debts and create a plan to pay them off. You could choose to focus on paying off the debt with the highest interest rate first or start with the smallest debt to build momentum. Read more on Lendstart: 5 Steps for Overcoming Credit Card Debt.
- Track your progress: Keep track of your progress by monitoring your debt balances and celebrating small wins along the way. This will help you stay motivated and on track.
- Communicate openly and regularly: Regularly check in with each other to make sure that you're both on the same page and adjust your plan as needed. Be open and honest about your financial situation and work together to achieve your goals.
Debt and marriage can be difficult to navigate because so many different scenarios can impact your finances. For example, depending on when the debt was taken out, who is on the name when you got married, and what state you live in can all impact how who is responsible for what debt and how it is split up. If you want to protect yourself from these negative situations, talk about your finances, get a prenup, and tackle debt as a couple.