If you are in the process of getting divorced, you know that you’ll need to come to an agreement with your spouse on how to deal with debt and separate yourselves financially. Debt may have been part of the marriage, but hopefully, it won’t be part of the divorce. It’s easier said than done, but the best scenario by far is to pay off your debt before or during the divorce.
Your financial lives usually get jumbled together in the course of a marriage. This includes your financial assets, but also your financial debts or liabilities. Division and responsibility for each will be part of the divorce settlement. Here are some key steps to address during the process.
Make a List
Start by making a list of your debts. A list of liabilities includes:
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- Mortgage
- Credit cards
- Auto loans
- Student loans
- Personal loans
- Legal fees
- Tax debt
- Any other debts, including loans from family members
Determine Responsibility
Some debts are easier to divide than others. Student loan debt is usually handled by the student. An auto loan might be assumed by the person who takes ownership of the vehicle.
Credit card debt is more difficult. Some cards may have joint responsibility, but many of us also use our individual cards for expenses for the entire family. Division of those debts may be a key financial issue in some cases.
Debt incurred during a marriage is generally the joint responsibility of both parties, as long as both are co-signers on the credit cards. In community property states, both are responsible, even for debt incurred by one partner.
Set a Deadline
It will be nearly impossible to divide your debts if they continue to grow. Set a date after which there will be no new joint debt. This will likely be the date of separation (physical or legal). Note debt balances as of that date.
After separation, debt incurred on credit cards is the responsibility of the spouse who made the purchases charged on the card. However, you can prevent any room for disagreement by using completely separate cards.
If possible, close your joint credit card accounts. Closing joint accounts will help you avoid the possibility of your ex-spouse incurring debt in your name. Open up a new credit card after you’ve separated and use it for your personal expenses going forward. This will keep your non-marital debt independent of the debts you accumulated while you were still married.
At the very least, have your name removed from any joint accounts that will continue to be used by your spouse. This will not end your liability for debts incurred up to that point, but it should end your responsibility for any new debts incurred on those accounts by your spouse. If you hold any accounts in your own name for which your spouse is an authorized signer, revoke the authorization. Keep detailed records of your charges.
Even if you disagree on responsibility for a debt, continue to pay all minimum payments on credit card accounts that bear your name. Failing to do that could compromise your credit score and adversely affect your credit history down the road.
Make a Plan to Pay Your Debt
There are several options for handling or eliminating joint credit card debt.
- Agree to transfer portions of joint debt onto individual cards and cancel the joint cards.
- Agree to use joint savings to pay off all or a portion of the debt.
- Agree to sell a car or other asset and use the money to pay off outstanding debts.
- Agree to use a home equity line of credit in a jointly owned house.
One person can also agree to take on payments toward credit card debt in exchange for keeping the car or another valuable item. This type of offset is known as an equalization payment and may be part of your divorce settlement.
If your debt seems insurmountable, bankruptcy may be worth considering. If you’re still married, you should file together so neither is stuck with joint debt. Filing for bankruptcy does not affect payments for child or spousal support. Consult a bankruptcy attorney.
Protect Yourself
Get a copy of your credit report. Comparing your list of debts with your official credit report will ensure that there are no surprises, and make sure that any debts not paid off in full are assigned to one spouse or the other.
After the divorce is final, you could still be liable for outstanding debt, even if your spouse agreed to pay it. If your ex files for bankruptcy or just does not pay the debts, your creditors could demand payment from you for the full amount of the debt, plus interest and penalties. Your divorce decree is an agreement you and your ex-spouse have with the court and does not legally change the contracts you have with your lenders.
Try to leave your marriage with no joint debt. By either paying off the joint cards together or dividing up the debt on joint cards and transferring it to cards in individual names, you eliminate your liability for your partner’s debts.
Developing a plan to divide and eliminate debt may involve tough decisions. However, it must be completed to proceed.
Sara Stanich, MBA, CFP®, CDFA™, CEPA is the founder of Cultivating Wealth, an independent, women-owned financial planning firm serving families and individuals nationwide. Residing at the intersection of life and finances, Cultivating Wealth offers fee-only financial planning services for people who want to take power over their wealth. To learn more, visit cultivatingwealth.com.
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