How Is Debt Handled During a Legal Separation?

Quick Answer

Legal separation is similar to a divorce in that it requires assets and debts to be divvied up by a judge—but unlike a divorce, it’s reversible. How things are divided depends on your state’s marital property laws.

Lawyer speaking to couple going through legal separation about debt

Some married couples know they're ready to part ways permanently, moving directly to the divorce process. Others aren't ready to permanently end the relationship yet and want time apart before deciding whether to reconcile or sever ties.

While there are steps every couple can take to responsibly handle finances during a separation, it's important to know that there are actually several different types of separation—and the ones available to you depend on your state.

With a permanent separation or legal separation (which is only allowed in some states), your property and any new debt may be divided similarly to if you were getting divorced. The responsibility for a debt falls on the person who accrued it.

What Is Legal Separation?

A divorce is a permanent legal decision not to be taken lightly. That's why some couples start with separation, a reversible step that allows some time to address issues and contemplate whether they want to continue the relationship or not.

In most states, separation is optional, and a couple can skip straight to divorce. However, some states do require a period of separation before a divorce, though it may only be for certain types of divorces.

There are a few different types of separation, and to make things more complex, the options vary by state. This article focuses on legal separation, but it's important to note that there are other types of separation:

  • Trial separation: Also called a marriage separation, couples may pursue this voluntary arrangement if they hope to iron out their issues and stay married. It doesn't require court intervention. From a financial perspective, the couple is still legally married and nothing changes. It can be ended anytime without involving a court.
  • Permanent separation: Couples who are past the point of reconciliation and live apart may be deemed permanently separated, without court filings required, unless and until proceeding with divorce. However, in some states, permanently separated couples are no longer responsible for any new debts the other party incurs. Permanent separation can also be ended any time by getting back together. Also, if a couple decides they are past the point of ever reconciling, a trial separation can become a permanent separation.

Legal separation, on the other hand, is a more formal process that does require filing a legal petition. It's not allowed in all states, but in those offering it, a judge oversees the division of assets and debts, along with determining custody and support (or you can come up with your own separation agreement). Be aware that some insurance plans treat legal separation like divorce, so if you don't want benefits terminated, look into the policy first.

While legal separation is similar to a divorce, it's considered temporary and can be easily undone by filing a motion asking the court to end it.

Some states allow legal separations to last forever as long as neither party remarries; a couple may choose to do this for reasons including religious beliefs, tax purposes or to retain certain benefits. Other states require a judge to give a deadline by which the couple must decide to divorce, reconcile or remain separated.

What Happens to Debt When a Couple Separates?

What happens to new and existing debt depends on the type of separation. As mentioned earlier, in trial separations, debts are still legally considered the responsibility of both parties.

In permanent separation, some states consider any post-separation income or debts to belong separately to that individual. A legal separation, on the other hand, is much more like a divorce.

There's another important factor to keep in mind: This process looks different depending on whether you live in a community property state. Some states assert that debt or assets are owned solely by the spouse who obtained them, unless they are explicitly owned jointly.

Some states use community property law instead, where most assets and debts taken on once the marriage begins are considered jointly owned. This is the case even if you didn't want to combine finances with your partner. However, some debts or assets are exempt, and others can be made exempt with a prenuptial or postnuptial property agreement.

Is Debt Handled Differently in Divorce vs. Separation?

Depending on your situation and whether you are in a trial or permanent separation, your debts may be handled differently from how they would be dealt with in a divorce.

How Debts Are Handled in a Divorce

In the legal process of a divorce, assets and debts are divided by the court. Couples in agreement can choose how to divvy things up, but those who can't agree are subject to state laws and judicial discretion.

Once finalized, a judge issues a divorce decree, which is a binding legal court order outlining the divorce's final terms. Whether the divorce was easy and uncontested, or contentious and had a trial, the divorce decree contains the final decisions on areas like division of property, custody, child support and alimony. If there is a settlement, the terms will be in there.

If the couple drew up a prenuptial agreement before marriage to keep some or all finances separate, it can override state laws upon divorce. For example, if a couple is in a community property state, but they had a prenuptial agreement that shielded one partner from the other's debts or kept personal income separate, it would trump the default state laws and be reflected in the divorce decree. Once the court signs the divorce decree, the marriage is officially over.

How Debts Are Handled in a Separation

Trial separations are completely different from divorces since a couple's finances are treated legally as though they're still married.

Permanent separations treat newly acquired debt and income as though the couple is divorced. How existing matters are handled depends on state law, though there's no court intervention or guidelines like in a legal separation or divorce.

In trial and permanent separation, it's optional—though advisable—to create a separation agreement together to reduce conflict. You could include things like who will pay which bills, if you'll continue sharing credit cards and checking accounts, how long you'll be separated, where each partner will live and how to handle custody and child support.

These guidelines are temporary and can be reversed, though if the couple does proceed with a split, a separation agreement can help as a starting point for handling money in a divorce.

In states allowing legal separation, these formal arrangements are much more like getting divorced. One person typically must petition the court for legal separation, and a court must grant it and issue a separation order.

Couples on the same page may be able to submit a separation agreement to the judge for review, but those in disagreement are required to let a judge decide on the division of marital debts and assets, custody arrangements and other matters.

In all types of separations, even those that seem to mirror divorce, there are key differences from divorce:

  • Separations are reversible and can be temporary, while divorces are permanent.
  • During a separation, neither party can remarry, while a divorce legally ends the marriage and allows for remarriage.

Be Aware of How Divorce Impacts Credit

If you proceed with divorce, it's important to know how divorce affects your credit. While ending a marriage doesn't directly impact credit, problems can surface if there's a miscommunication or one party doesn't hold up their end of the bargain. For example, even if the divorce decree states that your ex is responsible for a debt, creditors can still hold you liable for it. If you each take responsibility for a joint account, but your ex fails to make payments, those late payments will show up on both of your credit reports and can tank your score.

To avoid issues, proactively create a plan together, and you can simplify things by paying off and/or closing accounts when possible, or removing each other from joint accounts. It's helpful to check your credit regularly following a divorce to ensure there are no surprises.