Debt and Divorce: Understand Your Liability for Shared Debt

Are you faced with debt and divorce?

Divorce can be scary but when you're faced with debt and divorce, it becomes even more complicated. Know that you are not alone. Many couples find themselves knee deep in debt and have no idea what to do with it in their divorce.  The best option for shared debt in a divorce is to pay it completely off. Unfortunately, for many, this is not an option.  So what are the risks and what should you do?

If you are faced with debt and divorce, here are some important actions to consider:

Run a credit report.

This is a crucial step in determining just how much debt you have and can also help determine if there is any debt you weren’t aware of. We don’t like to think the worst, but it’s an unfortunate truth that hidden debt can be a common and unwanted surprise.

Use marital assets to eliminate debt.

Once you determine the amount of shared debt see if you can pay any of it off using marital assets before the divorce is final. This may not be possible but if you can pay anything off or even down a little it will be beneficial long-term.

Refinance in your own name.

Plan to refinance in your own names separately. If one spouse is keeping the house or car, it’s wise to have them refinance the loan or mortgage in their name. While your final decree may show that a specific spouse is now the “owner” of said item, the creditors don’t care if both parties are still listed. The creditor will still come after both of you if payments aren’t made.

Cut up and close joint credit cards.

Cut up and close out all joint credit cards. This is a crucial step to avoid one spouse using the card in the future. Even if you have a balance you can still call the card company and close out the account to avoid any additional purchases being made. While this is an important step, in some cases, I would caution you around the timing of doing this.  You may want to first consult with your CDFA about your specific situation.

Have a written backup plan.

Have a detailed backup plan written out in your decree in the case of a spouse not making payments or filing bankruptcy. It happens more often than we’d like to think. As with other loans and mortgages, credit companies don’t care what’s written in your decree. If both of your names are on a credit card, you are both responsible. If your ex-spouse fails to make payments or files for bankruptcy they will come after you for payment. It’s important to have a detailed plan of action for this scenario. Including holding the non-paying spouse responsible for paying fees if you have to return to court.

We don’t begin a marriage expecting to divorce, nor do we consider this scenario when we buy a house, car or open a line of credit with our partner. It’s important to be aware of your debt as you move through your divorce and to make educated and fair choices for both parties. Enlisting the help of a Certified Divorce Financial Analyst is a wise choice to assist you through this process. 

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