Understanding Debt and Equitable Distribution

  1. Separation & Divorce
  2. Understanding Debt and Equitable Distribution
Understanding Debt and Equitable Distribution

When you think of the concept of property division when couples divorce, it is easy to think that it literally refers to the division of property. As in, who takes what property with them when the dust settles? However, property division is far more complex than this and a couple’s debt is a critical aspect that must be properly addressed.

Divorce Does Not Absolve People of Debt

Almost everyone carries some type of debt. You may have a mortgage, an auto loan, a small business loan, credit card debt, student loans, or medical bills. Unfortunately, creditors are not known to be kind. So if you are facing a divorce, your personal life doesn’t matter to your creditors, who are solely interested in getting back their money. Under the law, debts do not go away just because a couple divorces.

North Carolina Divides Marital Debt By Equitable Distribution

North Carolina divides property by “equitable distribution”, which considers the fair market value of all marital property (assets and debts alike) and divides it in a fair manner. The classification of marital versus separate debt is a hard-fought issue, as only marital debt can be divided by a court, while separate debt remains the burden of the person who acquired it.

A critical question when classifying marital debt is: When was it acquired? This is a threshold question that the person seeking to classify debt as marital must prove to the court. Marital debt is generally the debt acquired between the date of marriage and the date of separation. If a debt was acquired before a couple’s date of marriage, then the debt will remain with the individual who brought it into the marriage. Likewise, debts that spouses take on after the date of their separation are also treated as separated debt—the law does not want to punish one spouse for the debts taken on by the other before or after they were legally married.

As with the classification of marital property, there are times that debts fall into a gray area. For example, a spouse has a mortgage that he brings into a marriage, but refinances the loan during the marriage and uses the funds for the benefit of the family. Here, a court may be convinced that part of the debt is marital debt as it benefitted the marriage.

In addition, courts may also consider and divide “divisible property” as part of equitable distribution, which includes the interests and fees that accumulate on marital debts between the date of separation and the final order of distribution.

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