There are nearly 48 million Americans with student debt. That’s a total of nearly $1.75 trillion in total debt in the United States. Can you guess which state has the highest average student debt per person? New Hampshire with an average of about $39,000 in student debt.
Student loans can create a lot of headaches when it comes to divorce. You know that you’ll have to pay them off, but what if you and your spouse aren’t on the same page about how you will go about this? What happens if your spouse contributes to your debt and then you divorce? How can a prenup affect your student loans? We’ll answer all of these questions in this blog.
Before going down this troubled path, consider a prenup for handling your allocation of debt. A prenup is a contract entered into before marriage to determine property division, debt division, alimony, and more. By drafting your own agreement, you can decide on the ownership of debt instead of having the government decide for you. That’s right–if you don’t get a prenup, there’s a “default prenup” that will be decided for you by your state law. The “default prenup” is your state laws. Keep reading to learn more about state laws, debt, and how prenups can help!
State Laws on Debt
There are a couple things to understand before we dive in. The first is that state divorce law controls what happens to your debt in a divorce. How debt in a divorce is handled varies from state to state. That means that what will happen to your debt in divorce (and without a prenup) will depend on your state. And you may not like the results. Let’s look at the ways in which states divide up debt.
There are two types of U.S. divorce property division methods: equitable distribution and community property. Equitable distribution is used by the majority of states (41 to be exact), and it divides property based on a set of factors, such as the length of the marriage, the age and health of each spouse, each spouse’s needs, each spouse’s financial contributions, and more.
This is in contrast to community property states, which are a minority of states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). Community property divides property acquired during the marriage 50/50 and leaves property acquired before the marriage separate, with some exceptions.
Community property states
An important aspect of understanding how debt is handled in a divorce in a community property state is when the debt was incurred. Debt incurred during the marriage (i.e., after the wedding day) will typically be considered community debt and subject to division in a divorce. Debt incurred before the marriage will typically be considered “separate debt.” Separate debt is usually not divided up in a divorce, but there are exceptions.
Under community property principles, if one spouse plans to take on student loans during the marriage, the debt typically belongs to both spouses and may be split 50/50 in a divorce. Even if only one spouse’s name is on the debt. That’s right–if you are married and your spouse decides they want to go to law school and take on hundreds of thousands of dollars in loans, if you divorce, that may be considered “community debt” and subject to a 50/50 split.
Some community property states, like California, have exceptions to this general rule. For example, a non-borrowing partner may claim that they did not benefit from those student loans, so they shouldn’t be responsible for them. In that case, the judges may not split up the debt between the couple. The theory behind this exception is the spouse taking out those loans will continue benefiting from the loans after your marriage ends, but the other non-borrowing spouse will not.
Under equitable distribution principles, how debt is divided depends on a list of state factors. The court will not split up the property 50/50 like it might in a community property state. Instead, an equitable distribution court will assign ownership to property and debt based on a set of factors to create a “fair” outcome. Each state has its own set of factors, but they tend to be similar. Some factors may include how long the marriage lasted, each spouse’s earning potential, and if there are children.
Another factor a court may take into consideration is when the debt was incurred (before or during the marriage). A spouse is generally not responsible for paying the debt incurred by their spouse before the marriage. However, debt incurred before the marriage may still end up being divided in a divorce depending on the factors and specific circumstances. Debts incurred during the marriage for one person’s benefit will generally be kept separate, but again, based on the factors and the circumstances that could change. Debt incurred during the marriage for both parties benefit will generally be considered marital property and subject to division.
Let’s look at a real-life example. There was a case from an equitable distribution state where the wife (who was a doctor) had medical school debt from before the marriage, but the stay-at-home dad husband ended up being assigned $100,000 of her student debt in the divorce. You may be thinking, “I thought debt incurred before the marriage would generally be kept separate?” Well, this is one of those cases where the state’s equitable distribution factors and the case circumstances come into play. The court has the authority to move the debt around to have an “equitable” outcome. The court, in this case, reasoned that, as a couple, since they decided to hold off on paying her student loans during the marriage to devote the wife’s income to other things, such as savings, investments, and other accounts, it indirectly benefited the husband. Thus, he should have to pay some of the student loans off, too!
Paying down debt during the marriage
Let’s see an example of how this might pop up. Spouse A took out student loans prior to the marriage. Then, during the marriage, Spouse A makes payments on the student loan debt from both spouses’ joint bank account, effectively using both spouses’ money to pay Spouse A’s debt from before the marriage. If they divorce, Spouse B is in a pretty unfair situation, having paid down part of Spouse A’s debt for years. Is there any resolution for Spouse B? This is a fairly common scenario, and it brings up many questions about how this would be handled should a divorce occur.
You will have to check with your specific state law, but in some states, a court may award a credit to the non-debtor spouse who contributed to the separate property student loan debt with the joint bank account. For example, in California (a community property state), the court will allow the helping spouse to be reimbursed for those payments made from the joint account to the other spouse’s debt, even if it was incurred prior to the marriage. However, the reimbursement may be reduced based on the extent to which that person or the marriage benefited from the loans and some other factors.
How can a prenup help?
There’s good news! A prenup can help you avoid all of those sticky situations. A prenup will override debt division state rules (community property and equitable distribution), and the court will abide by your rules for debt ownership (as long as it’s a valid prenup).
So, how do you actually go about avoiding paying another spouse’s debt in your prenup? One way to protect yourselves is to classify all new debt as personal/separate debt. This alleviates the non-borrowing partner from absorbing this debt after a divorce.
You can also make sure to clarify that all premarital debt is separate debt. That means any student loans taken out before the marriage will remain that person’s debt in the event of a divorce.
Another way to protect yourself is to designate whether a non-debtor’s payments towards a debt will be considered a gift or not. If it’s not considered a gift, that non-debtor making payments on their spouse’s loans may be eligible for reimbursement should you get a divorce.
A prenup has the ability to protect you from your spouse’s debt. Point blank, period. A prenup overrides state laws regarding debt division and allows you to create your own determination on who owns what debt.
With HelloPrenup, you can get a prenup in the comfort of your own home on our interactive prenup platform. It’s user friendly, fast, and affordable. Click here to get started on your prenup today!
Nicole Sheehey is the Head of Legal Content at HelloPrenup, and an Illinois licensed attorney. She has a wealth of knowledge and experience when it comes to prenuptial agreements. Nicole has Juris Doctor from John Marshall Law School. She has a deep understanding of the legal and financial implications of prenuptial agreements, and enjoys writing and collaborating with other attorneys on the nuances of the law. Nicole is passionate about helping couples locate the information they need when it comes to prenuptial agreements. You can reach Nicole here: [email protected]