In my professional opinion, there are three types of debt:
When Dan and I got married, we each had student loan debt. Dan also had a car loan. If you recall from our last #FridayFight blog, I don’t buy cars that I need to get a loan for (the newest car I’ve ever owned is our current 2010 Toyota Camry). So, as you can imagine, although Dan’s student loan debt was higher than his car loan, I was essentially hyperventilating over the thought of this liability on our newly combined balance sheet. So I found myself asking the following question many of us have asked, or may ask at some point:
When we get married, what are we actually responsible for when it comes to our lover’s debt?
WHERE DO YOU LIVE?
First things first, do you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin)? If yes, most debts incurred by either spouse during the marriage is considered jointly owned, even if only one spouse signed the paperwork for the debt. NOTE: if a debt was incurred prior to getting married, it won’t automatically become joint debt after saying “I do.”
COMMON LAW STATES AND MINNESOTA SPECIFICS
Dan and I live in Minnesota. If a state is not a community property state, which most states are not, then it is a ‘common law’ state. In common law states, only debts that benefit the marriage or debt with both spouses’ names on it will be considered joint. Each state can have specific guidelines that go further from that. For instance, Minnesota does not hold one spouse accountable for the other spouse's incurred debt (even if incurred post wedding bells). Minnesota has two exceptions to this rule: household articles and supplies used and purchased for the family, and medical services received by a spouse. These two exceptions only apply if the couple is living together. LawHelpMN.org is a great resource for our fellow Minnesotans to learn more!
STUDENT LOAN DEBT
For student loans, it’s not as easy as, “am I in a community property state (e.g., Wisconsin) or a common law state (e.g., Minnesota)?” As an example, in regards to federal student loans, it’s unlikely your spouse is responsible for the debt, even in community property states (where debt is typically held responsible by both parties). If you cosigned for your partner’s student loans at any time, then of course you will also be held liable for it, regardless of where you live. It’s more likely you would have done this with private loans than for federal loans. Private loans in community property states can absolutely be considered joint debt if incurred while you are married. However, some states may have exceptions to student loan debt specifically. And it’s probably about that time where I insert the following disclosure:
***We recommended contacting professionals (financial planners [hey, I know 2!], attorneys, and accountants) regarding your unique situation***
BEYOND THE DOLLARS
Dan and I each had our own debt coming into our marriage. Although we both were not legally held responsible for each other’s debts, we were still very much impacted by it. Prior to us getting engaged, I was contributing almost 4x the minimum payment towards my student loans. Once the engagement ring was on my left hand I transitioned some of those dollars towards our wedding fund. We had a shared vision in what that day would look like, and how much we wanted to spend on it.
As in our example, although you may or may not have any ownership over your partner’s debt, you will more than likely be impacted by it in some way. Your partner’s reduced cash flow may very well limit what the two of you experience together (like how much money each of you can fork over for a wedding).
The state you live in and when you obtained the loan may provide clarity on who is responsible for what debt. However, we encourage the couples we work with to think beyond the dollars. Yes, you can talk about the black and white details of the loan (amount owed, payment amount, payoff date, etc.). When that 5 minute chat is done, let the real discussion begin. Your relationship with debt started somewhere (hi mom and dad!). How did those initial experiences impact your decisions and outlook today? How is this different from your partner? In regards to the feelings and emotions you have around debt, what would you like to change? What would you like to stay the same? These are just a few starter questions to explore with one another. We are here to help guide you through each step of the way.
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.