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How Student Loans Are Evaluated in the Context of a Wisconsin Divorce

by | Jan 4, 2018 | Divorce

In a community property state such as Wisconsin, spouses are considered equal owners of all marital property, and assets are split 50-50 during a divorce. Many people (including some uninformed lawyers) think that student loans are not marital and simply go to the person who incurred the debt; the logic being, that the only person who benefits from having gone to school and incurring the debt, is the person who received the education. The other party argues that they derived no benefit from their spouse going to school and if they had to take out loans or incur debt to do so, that should be their spouse’s problem. While I understand the logic and emotional reasoning of persons who think that is the law, at least under Wisconsin law, it is flawed thinking. The bottom line is that any debt incurred during a marriage is part of the overall marital estate. As an attorney for over 20 years, I have seen many Wisconsin courts include the student loan debt in the distribution of debt between the parties.

Remember that marital debt to be divided may include: mortgages, car loans, personal loans (and some business loans) and credit card debt. In addition, many professional couples carry debt from financing their educations –and these days, it’s not unusual for that student debt to be quite significant, even reaching well into six figures! If someone incurs this debt while they’re married, who’s responsible for paying for it when the marriage ends? Are student loans considered separate or marital debt?

In McLaren v. McLaren, 265 Wis. 2d 529, 665 N.W.2d 405 (Ct. App. 2003), student loans were considered marital and assigned proportionally with other debts of the parties, between them. Not only did the court find such student loans as a joint marital obligation, it also included the pre-marital portion of the same. The court stated that, “marital assets and debts (collectively, the marital estate), include all of the property and obligations of the parties which were acquired before or during the marriage, unless specifically exempted by statute.” The court went on further to say, “the trial court did not misuse its discretion when it found the student loans to be marital debt.” Wisconsin law provides that all property not inherited or gifted is to be divided equally between the parties.

The Wisconsin Court of Appeals, in its McLaren decision/holding, continued, “The trial court went through a careful analysis during the trial on why the student debts should be included as part of the marital estate, the trial court having considered the length of the marriage, the contributions of both parties to the marriage, the husband’s contribution to the wife’s education and other factors that the court deemed relevant. The trial court examined the relevant facts, considered the proper factors under the property division statute (now. sec. 767.61 stats), and, using a demonstration rational process, reached a conclusion that a reasonable judge could reach. The trial court appropriately exercised its discretion in including the student loans in the marital estate and ordering (Sean) the husband, to pay the marital consolidation loan to equalize (Patricia’s) the wife, payment of the student loans.”

In the above-cited case, McLaren v. McLaren, the Wisconsin Court of Appeals reviewed a case involving a 10-year marriage where the wife’s student loans totaled approximately $26,000. The husband argued that the bulk of the wife’s student loans were premarital and that he received no benefit from them, and that because he derived no benefit from the wife’s education, the lower court erred by including all of the student loans in the marital estate and by failing to order the wife to be solely responsible for their repayment. The lower court had found that the couple did not distinguish the premarital student loans from the marital. Holding that the premarital student loans were transmuted into the marital student loans, the lower court included the entire student loan obligation in the marital estate and ordered the husband to pay a separate marital consolidation loan to equalize the wife’s payment of her student loans. On appeal, the court affirmed the lower court’s finding that the couple made certain decisions during the marriage that resulted in the student loans not being paid down, and that it was equitable under the circumstances to assign the husband non-student loan debt to equalize the wife’s payment of the transmuted student loans incurred both before and during the marriage.

Unless one can show that the debt did not serve a family purpose, one can expect that at trial, the court is going to determine that all debt, whether incurred before the marriage or during the marriage, similar to property division, is presumptively equal; this would include student loan debts, credit cards, lines of credit, home equity loans, car loans, business debts or any other personal debts and financial obligations. Even though the state courts cannot order the debtor name changed as associated with the particular student loan debt (particularly since student loans are regulated by the federal government), there is no reason to exclude the debt from the overall property division, even if one party is technically responsible for the obligation. The debt should still be included on the balance sheet when determining any equalization owed from one party to the other. The court has discretion to deviate from presumed equal property division, after considering all of the relevant factors under sec. 767.61 of the Wisconsin statutes, which in a shorter marriage, may be the length of the marriage and property brought into the marriage by either party. In dividing student loan debt during divorce, the key question is not who incurred the debt, but who benefitted from it. If your marriage ends soon after graduation, a student loan is more likely to be considered separate debt. But, if the loan made possible a substantial income from which both spouses benefitted over many years, there’s a better case for considering it to be marital debt. Remember, however, that there is no statutory or case law exception though to treating student loans any different than any other debts of the parties; parties who argue otherwise and it is unfair, as well as their lawyers, are simply misinformed on what the law is in this state on the subject of student loans, since at least 2003.

One way to protect yourself from being saddled with debt you feel you didn’t fairly incur is to lay out the expectations for ownership of the debt before you get married. A well-considered, thorough, properly-executed prenuptial agreement can save you a world of time and trouble if your marriage ends in divorce; and, if you stay happily married, it provides a foundation for clear communication about finances that I believe should underlay every marriage. If it’s too late for a prenuptial agreement, you might consider a postnuptial agreement before taking on student loans during the marriage. A postnuptial agreement can specify how those debts would be paid in the event of a break-up.

Hiring an experienced family attorney is the first step in helping protect your interests as to both property and debt division (including the above-enumerated student loan issue).If you wish to speak with an attorney about filing for legal separation or divorce, please call our office at (608)782-1469.

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