Is refinancing debt a good idea for divorcing couples?

On Behalf of | Sep 14, 2023 | Divorce, Property Division |

During divorce, the couple sorts out the division of marital property and liabilities, including specific debt. In some cases, settling these financial issues is a straightforward process. For others, it can get complex quickly.

Some assets can come with unpaid loans, such as homes or cars. During the marriage, you and your former spouse hold personal liability for these debts, specifically if listed in both your names. The court could designate one party to take responsibility for a specific loan. However, it does not automatically remove liability from the other party. It means the creditor can go after you if your former spouse has overdue payments, which can also affect your credit score.

A divorcing couple can avoid this situation by refinancing the loan, achieving the following:

  • Remove your liability
  • Remove your former spouse’s liability for the debt
  • Change the terms of the loan to allow one party to buy out the other’s share

This method usually applies to mortgages paid over a long time, but it could be an option to resolve issues when dividing other loan types. Seeking reliable legal counsel could help determine the best options, considering you and your former spouse’s financial situations.

Reorganizing liability for marital debt

Other options exist to remove personal liability when dividing debt between yourself and your former spouse. Some creditors allow one party to assume responsibility if they meet specific financial requirements. Sometimes, it is best to sell the property and divide the proceeds.

If you and your former spouse are unsure which way to go, you could wait and decide once other resolution options present themselves. Keeping the mortgage and sharing responsibility could be beneficial, especially if you’re still settling other pressing financial issues. Either way, refinancing the debt can always be an option long after finalizing the divorce so you can take it one step at a time.