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Kevin O'Flaherty

Divorce can be a complex and emotional process, and often couples' most significant issue is how to divide their debt. Credit card debt can be particularly challenging, as it is often held in one spouse's name but was incurred during the marriage. We'll discuss how debt is handled in Illinois divorce and strategies for dividing credit card debt.

Is Credit Card Debt Marital Debt in Illinois?

In Illinois, credit card debt is typically considered marital debt, which means it is subject to division during a divorce. The Illinois Marriage and Dissolution of Marriage Act provides that all marital property, including debt, should be divided equitably between the parties in a divorce.

However, this does not necessarily mean that assets and liabilities will be divided equally. Instead, the court will consider several factors when deciding about property and debt division, including the length of the marriage, the income and earning potential of each spouse, and the contributions of each spouse to the marriage. Find out more in our article,How Is Debt Divided in Illinois Divorce?

Difference Between Marital Debt and Non-Marital CreditCard Debt

Regarding credit card debt, the court will first determine whether the debt is considered marital or non-marital. Marital debt is any debt incurred by either spouse during the marriage, regardless of whose name is on the account. Non-marital debt, on the other hand, is any debt that one spousei ncurred before the marriage or after the couple separated.

Assuming the credit card debt is marital, the court will determine how to divide it between the parties. The court may allocate the debtbetween the spouses in several ways. For example, the court may order one spouse to pay off all of the credit card debt, or it may order each spouse topay a portion based on income and other factors.

What if Only One Spouse Incurred the Credit Card Debt?

It is important to note that credit card debt is typically considered the joint responsibility of both spouses, even if only one spouse incurred the debt. Both spouses may be liable for the total amount of the debt,regardless of who made the charges on the account. Sometimes a spouse will try to file bankruptcy before or after the divorce to adjust their amount of credit card debt. Depending on the timing, filing for bankruptcy can significantly impact debt distribution in an Illinois divorce.

How to Avoid Splitting Costly Credit Card Debt in Marriage

To avoid this type of situation, it is important for divorcing couples to work together to pay off any outstanding credit card debt before the divorce is finalized.

If the debt cannot be paid off entirely, the couple can negotiate how to split the remaining debt. This can be done by either selling assets, such as a home or car, or by using savings or investments to pay off the debt. Splitting the debt may involve dividing it equally, based on each spouse's income and earning potential, or both parties agree on another method.

Another approach is to transfer the credit card debt to anew account in the name of the spouse responsible for paying it. This can be done by opening a new account in the responsible spouse's name and transferringthe balance of the old account to the new one. This approach is only advisable if the responsible spouse can pay off the debt and both parties agree to thetransfer.

 

Dividing Credit Card Debt Through a Property SettlementAgreement

Sometimes, a couple may divide their credit card debt through a property settlement agreement. This agreement outlines how the debt will be divided and may include provisions for paying off the debt over time. A settlement agreement can be a good option for couples with significant debt, asit allows them to come to an agreement outside of court.

If none of these options are possible, it may be necessary to include provisions in the divorce settlement agreement that address how the credit card debt will be paid off and by whom.

Tax Implications of Credit Card Debt in Illinois Divorce

For example, if a couple has $10,000 in credit card debt and settles it for $5,000, the forgiven amount of $5,000 may be subject to taxes.This forgiven amount is considered income, and the spouse responsible for paying the taxes will need to report it on their tax return. This can result ina higher tax liability for that spouse, which can be an unexpected and unwelcome financial burden.

Debt Discharged in Bankruptcy

It is important to note that there are some exceptions tothis rule. For example, if the debt was discharged in bankruptcy,it is not considered taxable income. Additionally, if the debt was forgiven aspart of a loan modification or in exchange for services, it may not be considered taxable income.

Get Help to Avoid Unexpected Taxes

To avoid unexpected tax liabilities, it is important to work with a knowledgeable divorce attorney and tax professional. They can help you understand your legal rights and obligations and the potential tax implications of credit card debt settlement. They can also help you negotiate a settlement that minimizes the tax consequences and works for both parties.

Disclaimer: The information provided on this blog is intended for general informational purposes only and should not be construed as legal advice on any subject matter. This information is not intended to create, and receipt or viewing does not constitute an attorney-client relationship. Each individual's legal needs are unique, and these materials may not be applicable to your legal situation. Always seek the advice of a competent attorney with any questions you may have regarding a legal issue. Do not disregard professional legal advice or delay in seeking it because of something you have read on this blog.

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