Student loans & divorce in Indiana: 3 potential situations

Divorce leads to the division of marital assets with each party leaving the marriage with their share of assets and obligations. When navigating the property division determination portion of the divorce, the courts will generally take into consideration all marital property. This can include real estate and bank accounts as well as debt.

One form of debt that has surged in recent years is that of student loan debt. What happens to this specific form of debt during a divorce? The following will delve into three of the more likely situations and discuss potential outcomes. This discussion can help you find some guidance about what may happen in your situation.

Before delving into this discussion, it is important to note that family law is a creature of state law. As a result, the laws that govern the distribution of assets can be different in each state. The following will focus on the laws as they apply in Indiana.

Situation #1: Debt taken out before the marriage

It is likely that, in this situation, the court would consider the debt separate property. As a result, the debt may remain the sole responsibility of the individual who took out the loan. However, if the funds were used to also cover living arrangements used by both parties, there could be an argument that at least a portion of the debt is marital property.

Situation #2: Student loan taken out during marriage

Generally, the court will consider student loans taken out while married as a marital asset. There are some situations when the court may consider it separate property. In Indiana this could be true if, for example, the divorce happens either before the schooling is complete or shortly after graduation.

This is because Indiana is an equitable property division state. This means courts are encouraged to divide property in a manner that is "just and reasonable." This does not always translate into an exact split of property. In some cases, the court may decide an uneven split is the fairest option. In the situation noted above, one party to the divorce could argue they did not benefit from the loan and, as a result, it would not be fair to hold them responsible for repayment.

Situation #3: Spouse also signed as a co-signer to the student loan

Another potential hurdle: co-signing the loan. In these cases, contract law may require you to pay back the loan if you co-signed the agreement. It is possible to remove this obligation by having the primary loan applicant refinance the loan without using the other party to co-sign the document.

These are just a few considerations to consider when navigating the distribution of assets during a divorce. As a result, it is wise to discuss these and other factors with experienced legal counsel to better ensure a fair distribution before finalizing the divorce.