If you’re about to get divorced, you know you’ll need to agree with your spouse on how to manage your debts and separate financially. The 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 by far the best-case scenario is to pay off your debt before or during the divorce.
Your financial lives usually blend together during a marriage. This includes your financial assets, but also your debts or financial liabilities. The division and responsibility of 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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- Credit card
- Car loans
- Student loans
- Personal loans
- Legal fees
- Tax debt
- Any other debt, including loans from family members
Some debts are easier to split than others. Student loan debt is usually managed by the student. A car loan can be assumed by the person who becomes the owner of the vehicle.
Credit card debt is more difficult. Some cards may have joint liability, but many of us also use our individual cards for the whole family’s expenses. The division of these debts can be a key financial problem in some cases.
Debts incurred during a marriage are usually the joint responsibility of both parties, as long as both are co-signers on the credit cards. In joint ownership states, both are liable, even for debts incurred by one of the partners.
Set a deadline
It will be almost impossible to divide your debts if they continue to grow. Set a date after which there will be no new joint debt. This will probably be the date of separation (physical or legal). Note the debt balances as of that date.
After separation, credit card debt is the responsibility of the spouse who made the purchases charged to the card. However, you can avoid any possibility of disagreement by using completely separate cards.
If possible, close your joint credit card accounts. Closing joint accounts will help you prevent your ex-spouse from incurring debt in your name. Open a new credit card after your separation and use it for personal expenses in the future. This will keep your non-marital debt independent of the debts you accrued 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 liability for any new debts incurred on those accounts by your spouse. If you have accounts in your own name where your spouse is an authorized signatory, revoke the authorization. Keep detailed records of your charges.
Even if you disagree about responsibility for a debt, continue to pay all minimum payments on credit card accounts that bear your name. Failure to do so could jeopardize your credit score and negatively affect your credit history down the road.
Make a plan to pay your debt
There are several options for managing or eliminating joint credit card debt.
- Agree to transfer portions of joint debt to individual cards and cancel joint cards.
- Agree to use joint savings to repay all or part of the debt.
- Agree to sell a car or other property and use the money to pay off outstanding debts.
- Agree to use a home equity line of credit in a condominium.
A person may also agree to take over credit card debt payments in exchange for keeping the car or another valuable item. This type of compensation 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 are still married, you should file a return together so that neither is stuck with a joint debt. Filing for bankruptcy does not affect child or spousal support payments. Consult a bankruptcy lawyer (opens in a new tab).
Get a copy of your credit report (opens in a new tab). By comparing your list of debts with your official credit report, you ensure that there are no surprises and that any debts not repaid in full are attributed to one or the other of the spouses.
Once the divorce is final, you may still be responsible for the unpaid debt, even if your spouse has agreed to pay it. If your ex declares bankruptcy or simply doesn’t pay his debts, your creditors may require you to pay 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 alter any contracts you have with your lenders.
Try to leave your marriage without joint debt. By paying off joint cards together or dividing 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 split and eliminate debt can involve some tough decisions. However, it must be completed to continue.
Sara Stanich, MBA, CFP®, CDFA™, CEPA is the founder of Cultivating Wealth, an independent, women-owned financial planning firm serving families and individuals nationwide. Located at the intersection of life and finance, Cultivating Wealth offers fee-based financial planning services for people who want to take control of their wealth. To learn more, visit cultivatingwealth.com (opens in a new tab).
This article was written by and presents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).
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