When you divorce, you’ll need to divide your debts as well as your assets. Here’s an overview of how to handle marital debts.
When you divorce, you’ll need to divide your debts as well as your assets. Just like your assets, your debts will also be classified as marital (community) or separate. Generally speaking, each spouse is responsible for paying off any individually-incurred debt created prior to the marriage; these are separate debts. However, debts incurred jointly during the marriage are the responsibility of both spouses – regardless of who actually spent the money. Joint or marital debt can include the balance-owing on all joint credit-cards (including bank, department or other stores, and gas credit cards), joint bank accounts with overdraft provisions, joint mortgages, lines of credit, debts incurred to pay for necessities (such as food, clothing, shelter, and medical care) for either spouse or their children.
In, “Divorce: List Your Assets,” we showed you how to create a list of your joint and separate assets; now, you need to create the same kind of list for your joint and separate debts. (See “Divorce: List Your Debts” for more information about this.) Your list should detail whether the debt is marital or separate, how much you owe on each debt, the interest rate and term (if applicable) for each, and the monthly payment amounts and due dates.
If you can do so, your best option for handling marital debts is to pay off or refinance all of them in the name of the person assuming responsibility for the balance as part of the divorce agreement. If you can’t afford to pay them off, and you don’t qualify for a new loan to refinance them, you should consider closing the account to future charges. To do this, you need to tell your spouse that you’re closing the account, and send a letter via courier or registered mail to the creditor or financial institution asking them to close it. Sending a text message or email, or making a call to the creditor is insufficient – you need to send a typed or handwritten letter that must be signed for on receipt. Keep a copy of this letter along with the proof that it was actually delivered for your records.
Unfortunately, closing or suspending the joint accounts while the divorce is pending is not feasible for everyone. If this is the case for you, you should keep a close eye on the joint accounts to make sure that your soon-to-be-ex-spouse isn’t creating new charges – which you may end up being responsible for paying if your spouse is unable to do so. You will definitely want to discuss your options with your divorce lawyer; also, speak to your financial advisor for tips on keeping your credit record clean while the joint accounts are still open.
In the case of a joint mortgage, your options are either to sell the marital home in order to pay off the mortgage, or if one spouse plans to keep the house, then he/she must refinance the mortgage in his/her name only prior to the divorce being finalized. Remember that simply removing your name from the ownership does not change your obligation to repay the debt: your name must be removed from the mortgage itself. While you are waiting to sell or refinance your house, remember that your mortgage payments must remain current; your credit rating will suffer if you or your spouse miss payments – regardless of who plans to keep the house post-divorce.
You and your spouse should discuss which marital assets could be sold in order to pay off outstanding joint debts prior to divorce. Although one or both of you may have sentimental attachments to particular assets – this is often true of the family home, especially if you’ve lived there for many years – you both need to evaluate whether the pain of making an emotional sacrifice is greater than the pain of carrying an ever-increasing debt load. If you can’t repay your outstanding debts, you may face losing those cherished assets to bankruptcy or repossession by creditors in the long run anyway. If your debts have become unmanageable, you should consider consulting a credit counseling service or hiring a financial planner to help you create a repayment plan and budget.
One final note: if you don’t have a credit card in your own name, you should apply for one ASAP in order to starting build your individual credit history. Use it to make small purchases and pay it off on-time and in-full every month. Establishing and maintaining a good credit record now is important: potential lenders will look at your record to assess how much of a financial risk you might be in the future, which could make the difference between getting a loan or mortgage or not.
For more information about debt and divorce, please go to www.divorcemag.com/debt-and-divorce.
