Dividing debt during a divorce can feel overwhelming, especially when credit cards, loans, mortgages, or financial disagreements are involved. In North Carolina, debt division during divorce is handled through a legal process called equitable distribution. Depending on the circumstances, marital debt may be divided between spouses fairly – though not always equally. Understanding how debt division in North Carolina divorce cases works can help you better prepare for the financial decisions ahead.
Distributing Debt in a Separation Agreement
The first way for a couple to divide their debt is to work together and resolve the issue outside of court. Also known as “alternative dispute resolution,” resolving issues without involving a judge is becoming increasingly popular across the country. Resolving issues outside of court often saves money and time and reduces stress. Just as importantly, it truly gives couples the freedom and flexibility to find the solutions that work best for their family.
After couples negotiate and agree on how to divide their debt, they can document their solution in a separation agreement, which, if signed by both parties, will be binding going forward. Truly, when couples resolve their issues outside of court, they can address them however they see fit. As far as debt is concerned, it may be a 50-50 split, or one party may agree to assume more of the debt in exchange for something else they want.
Even though out-of-court agreements are often preferred, they don’t always work for all families. Sometimes, for any number of reasons, having a court decide the issues in a divorce is the best choice.
Courtroom Litigation
If a couple chooses to litigate their issues in court, the court will review the evidence presented by the parties and, if they do not have a prenuptial or postnuptial agreement, will attempt to divide the debt based on the principle of “equitable distribution.”
Although it may sound like a complex term, what “equitable distribution” essentially means is that when dividing property, courts will seek to do so in a manner that is fair and just to both parties. It’s important to understand that this method focuses on the overall situation in a marriage and takes into account many factors, including the income, assets, and liabilities of both spouses. As a result, what a court considers to be “equitable” may not always be an exact 50/50 split.
In attempting to make an equitable division of property, including debt, a court will also consider the “character” of the property involved. Generally speaking, North Carolina courts divide property into three categories:
Separate
A separate party typically includes property that either spouse acquired prior to the marriage. It may also include gifts or inheritances given only to one spouse, income that one spouse derives from separate property, increases in the value of separate property, or property acquired in exchange for separate property – provided that the spouse does not comingle those assets with marital funds. During a divorce, if this property has truly remained separate throughout the marriage, it will go to the spouse who held it throughout the marriage.
Marital
Unlike separate property, marital property is property obtained by either spouse during the marriage, regardless of whose name is on the title to that property. It includes income from work, passive income from various sources, personal property, real estate, and any other property that one of the spouses obtained during the marriage and which was not specifically kept separate from other assets. During a divorce, courts will attempt to divide marital property equitably between the parties.
Divisible
Divisible property is a third category of property that includes changes in the value of marital property that occur between the date of separation and the date that property is actually distributed.
Debt, like all other property, is divided into one of these three categories. As a general rule, separate debt remains separate in a divorce, while marital property is divided.
After reviewing all of the arguments made by the parties on the issue of debt division and the evidence they have submitted in support of those arguments, a court will enter an order setting forth its findings on various issues, including the division of debt. It’s important to understand that once a court issues an order, it is binding on the parties until and unless the court later modifies it.
What if One Spouse Engages in Intentional Misconduct?
In some cases, one spouse may be able to present evidence that the other spouse intentionally made extravagant purchases, misused credit cards, or otherwise created excessive debt. When one spouse engages in reckless misconduct of this kind, the spouse who is not engaging in the misconduct may request an injunction from the court to stop the offending spouse from continuing the misconduct. In addition, depending on the circumstances involved, a court may require a bond or some other type of assurance to protect the interests of the non-offending spouse.
The court may also require the spouse who engaged in the misconduct to take on a greater share of the debt in the divorce. While this does not happen in every case, a court will typically consider misconduct very carefully.
Understandably, you may have many questions about your specific circumstances and how your debt may be divided. The good news is that help is available for any questions you may have about this or any other issue. You never have to navigate this journey alone. At McCrary Pack, we’re here for you.
MCCRARY PACK – HERE FOR YOU
At McCrary Pack, we know that when you decide to divorce, you have many issues to think through. It can be hard to process all of those decisions at once, and it’s normal to worry about whether or not you’re making the best ones for your situation. The good news is, you don’t have to do it alone. We’re here to help.
Our team understands every aspect of the divorce process – in fact, it’s all we do. We know that on this journey, you need a guide who can walk with you each step of the way and help you navigate around any pitfalls you might encounter. We’ll do exactly that. We’ll meet you where you are, and together, we’ll reach a brighter chapter ahead. If you’re ready to take the first step today, give us a call. We look forward to speaking with you soon.