If you are considering a divorce, it’s likely that you are also trying to determine the financial implications of parting with your spouse. As far as student loans go, the rules are fairly cut and dry, and this post is intended to help you understand them in detail.
What Happens to Student Loans in Divorce Depends on When the Debt Was Incurred
For the purposes of this discussion, there are essentially two types of student loans: (1.) those taken out before marriage and (2.) those taken out during the marriage. In almost all cases, student loan debt taken on before marriage will remain the sole responsibility of the individual who signed for it after divorce.
If the debt was taken on during the marriage, things can become more complicated. In the event that you co-signed a loan for your husband or wife, the lender can hold you accountable for the debt. This is true even if a divorce decree states that only one party is responsible for the debt. (The divorce decree spells out the obligations that individuals have to one another after the marriage ends, but it doesn’t affect any obligations to the lender.)
In other cases, responsibility for the debt may be determined not only by when the debt was taken on, but by where you live and who benefited from it.
State Laws: Common Law vs. Community Property Law
In the United States, there are essentially two different systems of property law: (1.) common law and (2.) community property law. The state where you live, and the system of property law it adheres to, will determine your rights and obligations to property (and debt) in the event of a divorce.
Common law is the most widely adopted properly law system in the US – it’s in use in 41 states.
Under common law, each spouse is considered an individual, with distinct rights and obligations when it comes to income and property.
In common law states, debts typically follow the individual who signed for them. In other words, the individual whose name and credit were used to secure the debt is its rightful owner, even in the event of a divorce.
Logically, a joint obligation is created when both parties sign for a debt during the marriage.
Community property law
There are nine states in which community property law is in use. These are Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin. The U.S. Territory of Puerto Rico is also a community property jurisdiction. Alaska is an optional community property state, meaning that a couple can chose to enter into a community property agreement.
What is community property?
“The theory underlying community property is analogous to that of a partnership. Each spouse contributes labor (and in some states, capital) for the benefit of the community, and shares equally in the profits and income earned by the community. Thus, each spouse owns an automatic 50% interest in all community property, regardless of which spouse acquired the community property. Spouses may also hold separate property, which they solely own and control, but the law in the community property states does not favor this.”
Unlike common law states, community property states consider debt taken on during the marriage community property (or property of the couple), regardless of whether both parties signed for the it. Importantly, this only applies to debt taken on during the marriage. Debts such as student loans which were taken on prior to the marriage will remain the obligation of the original borrower.
What Will Happen in a Collections Effort?
If you co-signed for a student loan or it was taken on during the marriage and in a community property state, you may be legally obligated to repay the debt in the event of a divorce. During a divorce, a court may issue a divorce decree which states that only one party is obligated to repay the debt. However, the decree only names the obligations that individuals have toward one another, and it will not negate the obligation that either has to the lender.
While the rules with regard to how student loan obligations are divvied up in the event of a divorce are fairly well-established, individual circumstances vary widely. So, the best way to guage the potential outcome of your situation is probably to talk to a qualified attorney in your state of residency.