Credit Card Debt and Divorce in New Jersey – Who Is Responsible To Pay

When parties are separating or divorcing one of the key issues to be addressed is any credit card debt incurred during the marriage. As a general rule, marital debt is joint debt as long as the debt is incurred for “marital purposes” or “family expenses”.

Here are some examples where a balance racked up on a credit card or store charge card is considered marital debt:

One Name On Card – Sole Use By One Party

Wife has a credit or charge card in her sole name. She uses the card to purchase her clothing and for her other day-to-day expenses. Her husband never uses the card. He doesn’t see the statements, and he has no idea what the balance is on the card. Wife’s credit card balance is considered marital debt to be allocated between the parties in their divorce.

One Name On Card – Joint Use By the Couple

Husband and wife have a charge or credit card in their joint names. They use the card to purchase items for the household and each uses the card to purchase individual items for themselves. The debt incurred in this case is joint marital debt subject to allocation in the divorce.

Joint Names On Card – Sole Use By One Party

Husband and wife have a credit or charge card in their joint names. Husband uses the card for his dry cleaning, his motorcycle accessories, and his car’s gasoline. The debt would be considered joint marital debt.

Joint Names On Card – Joint Use By The Couple

Husband and wife have a charge or credit card in their joint names. They both use the card for expenditures for their own personal items. The accumulated debt would be marital.

When Is Debt Accumulated During the Marriage Not Considered Joint Debt

After reviewing the above, you may ask under what circumstances credit card or charge card debt incurred during the marriage is only one party’s responsibility. The answer is that generally, if one party incurs debt solely for their purposes, with no benefit to the other party or the family unit, an argument can be made that the accumulated balance is that individual’s sole debt. An example of a non-marital expense is credit card usage to pay for funeral expenses for one spouse’s parent.

How Is Debt Accumulated During the Marriage Divided During a Divorce

If your divorce case does not settle prior to trial, at trial the judge will take testimony as to how much debt was accumulated during the marriage, and how it was incurred. The judge will then decide how the debt will be split. The judge has wide discretion to render a decision which she or he feels is equitable under the circumstances. The judge will look at the parties’ financial circumstances, including their post-divorce income and expenses. Depending on how they see the case the judge may split the debt in half, or allocate the debt in other percentages which they think are fair under the circumstances.

If your divorce case is like most cases and settles prior to trial, your property settlement agreement will spell out who is paying what portion of the marital debt. This issue is open to negotiation between the parties. Often times in exchange for a concession in another area one party will assume responsibility for all of the debt, or a majority of the debt.

How Is Marital Debt Paid Off After the Divorce

The procedure for actually paying off marital debt post-divorce may require some negotiation. The first order of business is to decide what to do with the debt moving forward post-divorce. Will the account remain open or be closed? Will the parties’ be able to continue to utilize the card and rack up more debt? (The answer is generally no). How long will it take to reasonably pay off the debt, and who will physically transmit the payments. What happens if there is a failure to make timely payments on the debt?

Closing The Account

If the marital debt is in joint names the account should be closed so that neither party has the power to individually rack up more joint debt. If the marital debt is in a sole name (with a sole user) then the account can remain open, as the other party has no power to increase the debt.

What Is the Term of the Payoff

The parties have to agree on the debt payoff term. How much will each of them contribute each month in order to pay off the principal on the debt in a timely manner?

Who Will Transmit the Money to the Creditor

The parties also have to agree on who will actually be responsible to transmit the monthly payments to the creditor. If it is debt in joint names then both spouses can make a monthly payment, or one spouse can forward the monies to the other spouse each month for payment. If it is debt in one party’s sole name that party should receive a monthly payment from the other party toward paying down the debt.

What Happens if There Is a Failure To Pay

A marital settlement agreement should have general indemnification and hold harmless clauses relating to payment of debt. An indemnification clause is a clause that covers the situation where there is a marital debt and the parties agree on how that debt will be paid off (either through joint contribution or one person paying).

If either party fails to pay the debt in accordance with the agreement, and the creditor comes after one or both parties looking for repayment, the indemnification clause protects/indemnifies the innocent party. The clause provides that the innocent party can pass along any costs that it incurs in defending itself from the creditor to the party who breached the agreement by not paying the debt.

A hold harmless clause is a similar clause which protects the innocent party if the other party fails to pay debt for which they have agreed to be responsible. The innocent party is “held harmless” meaning that the party responsible for paying the debt cannot sue the innocent party or otherwise make them responsible for paying the debt.

Unfortunately, neither the indemnification clause nor the hold harmless clause do anything to force timely payment in advance. If an ex-spouse fails to make timely payments on debt both clauses come into play after the damage to credit ratings has been done. To further protect the innocent party an attorney fee indemnification clause should also be inserted into the marital settlement agreement. The attorney fee indemnification clause should specify that if a payment toward debt is not made on time that the innocent spouse can bring an enforcement motion in court and receive attorney’s fees for the cost of bringing the motion. This clause provides some protection to the innocent spouse and some punishment (paying the other party’s attorney fees) as an incentive to the other spouse to make their payment toward the debt on time.

In addition to having the indemnification clause and hold harmless clause in the settlement agreement the more responsible spouse can also place a provision in the settlement agreement that they will make the payments directly to the creditors, and the less responsible spouse will have to reimburse them. This allows the more responsible spouse to protect their credit from late payments, and if necessary pursue the less responsible spouse in court with an enforcement motion if they fail to reimburse on a timely basis.

Who Is Responsible For Individual Pre-Marital Debt

Generally, whatever debt is brought into the marriage by each party remains their individual debt when they divorce. You cannot be held responsible for your spouse’s individual debt just because you married them. The debt is personal to the person. It does not get transferred to you based on marriage.

I have been representing clients in divorce cases in Northern New Jersey, including courts in Bergen, Hudson, Essex, and Passaic counties for more than 20 years. If you need a divorce lawyer with experience handling credit card and other debt issues in a divorce give me a call at 201-731-3086.  Or e-mail me using the e-mail contact form. Either way that you choose to contact me, the consultation is at no charge to you.