10 things you may not know about how debt is handled during divorce

Featured

Written by:

There’s nothing easy about divorce. In addition to the emotions involved, there are difficult decisions inherent in separating one life back into two. Whether you want to face it or not, divorce is a common part of life. Ninety percent of people marry by age 50, according to the American Psychology Association. But 40-50% of married couples divorce. During their time together, they likely accumulate assets and probably create debt. Knowing what happens to finances through a divorce can help people avoid catastrophe later.

Here are 10 things you should know about how debt is handled during a divorce.

1. Debt responsibility varies by location 

When it comes to untangling your financial life during a divorce, your location determines in large part who is responsible for what debt. 

______________________

SPONSORED: Find a Qualified Financial Advisor

1. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.

2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you're ready to be matched with local advisors that can help you achieve your financial goals get started now.

______________________

 

 

 

For example, community property states hold both spouses liable for debts they incurred while married regardless of whose name is on the account, as a general rule (exceptions do apply). Community property states include:

  • Arizona
  • California
  • Idaho 
  • Louisiana 
  • Nevada
  • New Mexico
  • Texas 
  • Washington 
  • Wisconsin

2. How an equitable distribution state handles debt 

The majority of states adhere to the “equitable distribution” rule. In these states, a family court judge will decide what’s equitable (or fair) and distribute assets and debts accordingly. Each spouse can legally claim what they feel is a fair and equitable amount of their assets as well as their debts. 

Assets and debts may not be divided using the same formula in every case. One spouse could have more debt than assets or vice versa.

3. Lender contracts remain in place despite divorce 

A divorce doesn’t matter to your lenders. One or both of you signed a loan agreement to borrow money. That obligation isn’t affected by a divorce. Creditors don’t tend to know whether or not you have gotten divorced because this information doesn’t appear anywhere like a credit report. Changing your name or address will not get you off the hook for repayment of any outstanding balances.

4. Creditors may come after you on your ex-spouse’s accounts 

Creditors often pursue the other spouse for payment on delinquent accounts. This can happen even when the innocent spouse’s name is not on the account. It can also happen even where the spouses are no longer married. 

If you live in a community property state, one way to counteract this is to include a provision in your divorce decree that indemnifies you on any account in your ex-spouse’s name should they default. Besides repaying the debt, you’ll also be responsible for late fees and any collection costs.

Another option is to pay your ex-spouse’s debt and keep proof of payment. Then, you can contact family court and ask them to help you get reimbursement from your ex.

5. Student debt isn’t shared in some situations 

While a mortgage, car loan, and credit card debt may be shared debt, student debt is different. If you racked up student loans before marriage, that debt remains your sole liability. The only way that student debt in your ex-spouse’s name would be your responsibility is if it was listed that way in a prenuptial agreement.

6. Student debt acquired during marriage can get tricky

When student loan debt is incurred during the marriage, it becomes a bit more challenging to navigate. Unless both spouses co-signed for that student loan, the issue of who is responsible then depends on the state you live in (i.e., community property or equitable distribution state) and who benefitted from the student loan.

7. Joint responsibility for unsecured debt 

Unsecured debt like credit cards is the fiscal responsibility of both parties in a divorce. If you both decide to not pay it off, then both of you will see your credit scores dip. When you are splitting up assets during a divorce, it’s a good idea to consider using some of those proceeds to get rid of the joint credit card debt.

8. Consider refinancing existing debt 

If your divorce is relatively civil, you may want to discuss refinancing your existing debt to remove each other’s names from specific debts, leaving only one spouse responsible for those payments. You may each have to apply for your own new loan. Sometimes this can be challenging due to a low credit score or reduced income. This strategy can help each person move on financially, mentally and physically.

9. The best option is no debt 

While some amount of stress in divorce is probably unavoidable, one way to make the process smoother is to agree on paying off debts prior to filing for divorce. If you can look past individual needs and focus on achieving a mutual benefit, this can provide financial advantages for both of you.

10. Consider mediation and get legal guidance 

To facilitate how you handle debt during divorce, consider working with a mediator after seeking professional legal counsel.

While mediation may not always work, it’s worth trying to see if you can reach a mutually agreeable decision on how to split assets and debt. This approach can minimize the legal costs that you would both have to pay – a significant cost to bear when you’re already faced with considerable debt.

11. Final thoughts 

Divorce and debt are both challenging individually. Combined, they can create a truly stressful blend of complex legalities. Learning more about the legal and financial complications can help separating couples take a positive and proactive approach to handling debt.

Related:

This article originally appeared on Debt.com and was syndicated by MediaFeed.org.


This website is intended for informational purposes and as a reference tool to match consumers with companies that may be able to assist them. View our Advertising Disclosures here.

More from MediaFeed:

7 strategies for rebuilding your credit after divorce

7 strategies for rebuilding your credit after divorce

Getting a divorce is fraught with stress and challenges. In many ways, it feels like you’re starting over from scratch. One of the biggest challenges is rebuilding your credit.

Maybe you didn’t have any credit in your name while you were married. Or perhaps both of you had credit but also ended up with a lot of debt.

That could lower your credit score and limit your access to future credit. In fact, 60 percent of people say divorce hurt their credit, says MagnifyMoney’s 2017 Divorce and Debt Survey

Click or swipe through to learn seven ways to rebuild your credit after a divorce.

DepositPhotos.com

Before you can achieve any goal, you first need to establish where you’re starting from, and rebuilding your credit is no different. So the first step toward getting your credit in shape post-divorce is to find out what your current credit score is. This helps you determine how far you have to go to earn a number that opens up financial opportunities.

During this evaluation process, study why you have your current score. You’ll need a copy of your credit report from each of the three main reporting agencies, Experian, TransUnion, and Equifax. It’s fast and easy to request these.

Your credit report will show you what debts you may be responsible for, including any joint accounts opened during the marriage you weren’t aware of. Or, you can spot inaccuracies so you can start addressing them.

DepositPhotos.com

Most separation of financial responsibilities should have occurred during divorce. However, credit reports may not reflect all those changes. They may show you joint accounts you didn’t know about and must now address.

The initial impact could mean a further drop in your credit score due to a smaller amount of available credit. But, this is just part of the process of cutting the cord with your ex and establishing your own financial history. Plus, once you establish your own credit, that score will start to go up again.

For every joint account still open, you’ll most likely have to write a letter to the creditor. In the letter, request account closure or name removal. Then provide proof of the credit closures to each credit reporting agency.

DepositPhotos.com

Now it’s time to create a step-by-step plan to work through over time. Not only will this plan be a roadmap for financial recovery, but you’ll be able to use it as a motivating tool as you make slow and steady progress along the way.

A spreadsheet like Excel or Google Sheets provides a way for you to develop a timeline of actions you’ll take with potential achievement dates.

You can also provide links to research where you have further direction on how to address a certain tactic. Plus, you can add notes related to follow-up or make further changes as you try other tactics.

DepositPhotos.com

Open your own checking and savings account at a local or online bank. You may want to consider a credit union that offers competitive interest rates and other financial products. These additional products could help you when you are ready to apply for new credit.

As a woman, you may want to ensure that you’ve first taken care of any legal changes to return to your maiden name before opening these accounts. That also means having the right photo identification to verify that new name you want to use.

ipopba/istockphoto

Before you look at accessing any new credit, start with smaller actions that can have a big positive impact. One of these actions is to pay your existing bills on time, every month. 

These bills might include a mortgage or rent payment, utility bills, cell phone bill and any loan repayments for things like student debt, credit cards, or vehicle loans.

First, doing so will start to show credit reporting agencies a track record of financial responsibility. Second, paying bills on time will help you avoid late fees so you can use that money for making larger payments on installment loans or for establishing savings.

One of the best ways to ensure on-time payments is to establish automatic bill pay and set it for a few days before the actual due date. If you are struggling to make on-time payments because all your bills come due at once, ask some of your creditors if they can adjust the due dates so you spread out these financial obligations.

DepositPhotos.com

Before applying for credit that can eventually raise your credit score, you want to make sure your new financial house is in order. That means doing an audit of your financial situation and developing a monthly budget.

Take an inventory of your new income and expenses as a single person, accounting for alimony and child support payments (as income or an expense, depending on which spouse receives or covers these). Include all sources of income as well as all costs, including bills, groceries, repairs, insurance, and other regular expenses.

Knowing this will help guide your choice when it comes to applying for credit and just how much you can use that credit each month without falling into the overspending trap.

Plus, when you see how much money you have leftover each month by staying on a budget, you can start to add in other financial strategies beyond rebuilding credit like savings and retirement.

DepositPhotos.com

To rebuild your credit, you’ll need to start with credit products available to those with bad or low credit scores. Those choices include a secured credit card.

This is where that budget and establishing some reserve money each money will help. A secured credit card requires you provide a deposit amount in the secured credit card account before you can start using the credit card.

The limited borrowing power enables you to safely cover repayment and start to establish your credit worthiness again.

goodluz/shutterstock

No matter what your background, rebuilding credit takes time and involves consistent and responsible decisions on how to use money and credit. Celebrate each increase in your credit and relish the financial freedom and awareness you are creating for yourself.

Related:

This article
originally appeared on 
Debt.comand was
syndicated by
MediaFeed.org.

Deposit Photos

Featured Image Credit: stevepb / Pixabay.com.

AlertMe