When Debt is in the Picture + How a Prenup Can Help!

Jul 15, 2022 | Finances, Relationships, Wedding

Wedding planning can bring finances to the forefront of your mind. In addition to dreaming about dresses and wedding cake, you may also find yourself fixated on your partner’s lingering student loan, credit card debt, or maybe even joint wedding-related debt! Who is on the hook for that? Well, with a prenup, you can take much of the unknown out of these scenarios.

People often associate prenups with wealth, not debt. But the truth is that prenups can cover all sorts of financial situations.  Marriage comes with the good and the bad, and that is true for the relationship and the finances. While you may be entitled to a portion of your spouse’s property and assets, you could also be on the hook for their debt as well. But, just as couples use prenups to protect their own assets, they can also use prenups to protect themselves from their spouse’s debt.

Debt, Marriage, and Divorce

Once you get married, you and your spouse’s property will be considered marital (AKA community), and/or separate (AKA non-marital) property. Generally, marital or community property is property acquired during the marriage – though there are exceptions. In addition to income, real estate, and investments, debt can also be considered marital property. If an asset or liability is considered marital property, that means it is the joint property (or responsibility) of both parties.

Depending on the state you live in, if a particular debt is determined to be marital or community property, you could be on the hook for as much as half of it. Specifically, community property states (California, for example) take the position that regardless of the contribution to a community asset or liability, both spouses are entitled to half. Alternatively, in equitable distribution states, upon divorce, state courts attempt to allocate the assets and liabilities “equitably”. However, what is equitable and how the court goes about achieving that can vary wildly and ultimately, is out of your control if you don’t get married with a prenup.

So, let’s illustrate this with an example. Dave and Sarah enter blissfully into marriage without a prenup. They each have their own bank accounts and credit cards and don’t discuss finances too often – although Sarah does notice that Dave is always impeccably dressed and behind the wheel of a fancy car. Down the road, they eventually divorce. It’s at this point that Sarah learns that her soon-to-be ex-spouse has extensive credit card debt as well as a large car loan. During divorce proceedings, the court decides to split everything down the middle – including Dave’s debt. Yikes!

If you disagree with this unfair outcome, don’t fear! Had this couple entered into a prenuptial agreement, they could have specified that their debt should be considered separate/non-marital property. With that in mind, you and your spouse can avoid this misstep by entering into your own prenup.

How a Prenup Can Help

First and foremost, a prenup can start important conversations about finances with your partner to ensure you are both on the same page. These conversations can reveal important things about your partner including their views on spending and debt – and also whether they currently have any debt. Many couples enter into marriage without knowing much at all about their partner’s finances. Prenups definitely prevent that!

You and your honey can also decide how you want to treat any debt that is accrued before or during the marriage. Doing so can potentially protect you from creditors during the marriage and protect yourself from being allocated any of your partner’s debt upon divorce.

In general, if your spouse has credit card debt, for example, and they fail to pay it back, creditors could potentially look to you to repay your spouse’s debt. This can especially be the case if you have shared bank accounts or other shared assets. By specifying that your spouse’s debt is theirs and theirs alone, you can potentially protect yourself. However, prenups aren’t binding on third parties so keep that in mind. But, if you really want to ensure that you are protected from creditors, you can have your spouse agree to indemnify you if any creditors come after you for your spouse’s debt.

Additionally, and perhaps most importantly, you can decide what happens to your debt should you and your spouse divorce. You and your spouse can decide to split certain debts or attribute certain percentages to each other. Additionally, you can determine that some debt is wholly the responsibility of one spouse. You should also preemptively consider debt that may not be in existence yet as well as debt that may be associated with you or your spouse’s business (read more on this here!). The sky is the limit when it comes to creating an arrangement that works for you and your partner.

Student Loans Considerations

Many couples enter into their marriages with substantial student loans which can give their partners pause. Are you responsible for your partner’s student loan? Well, it depends. First, if the loan was taken out prior to marriage, it will likely be considered your partner’s separate property.  Even if the loan was taken out during the marriage, you likely still won’t be responsible for any portion of it – unless you co-signed. The federal government isn’t likely to come after a spouse for the repayment of a student loan. However, it is a different story if your student loans are private. In this case, you will definitely want to address responsibility for these loans.

Even if you have a federal student loan, you will still want to specify responsibility for repayment. While creditors may come after you for repayment if your spouse defaults, the court could still require you and your spouse to share in the repayment of the loan, especially if you benefited from it (i.e. your spouse went to medical school and you reaped the benefits of their high salary).

How HelloPrenup Can Help

Merging your financial lives can be scary, but a prenup can provide you and your partner with peace of mind that you are both protected. At HelloPrenup, the process of creating your prenup could not be easier. We help navigate you through the drafting and negotiation process. Our platform allows you to make a totally customizable agreement tailored to the needs of you and your spouse. If debt is a concern for you, you can include provisions and terms related to current or potential debt and allocate it in any way that you and your partner wish. Take a look at some of the clauses available here.

You are writing your life story. Get on the same page with a prenup. For love that lasts a lifetime, preparation is key. Safeguard your shared tomorrows, starting today.
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