Divorce is a sad fact of life for millions of Americans. In 35 years of counseling people with debt problems, we’ve seen our share of divorce-related debt crises. Understanding how to handle your joint debts in a divorce can help you avoid being driven to financial ruin by your ex-spouse’s behavior.
Here are some things to consider if you are facing the dissolution of your marriage:
- Are you sure you’re doing the right thing? Have you tried marriage counseling, a trial separation, or some other attempt to salvage your relationship? A divorce during tough economic times will hit especially hard; if your split is amiable, can you stay married until the economy is healthier? Divorce, like bankruptcy, is the kind of life-changing event that one shouldn’t enter into lightly. Make sure you are absolutely certain you are doing the right thing before you take such a drastic step.
- Establish your own accounts. If you can, you and your spouse should each establish your own individual credit accounts. Do this before your credit is impacted by any defaults that might result from the divorce. If you are on good enough terms with your spouse, talk about splitting up credit card debt by transferring your portion of the household debts to your own individual credit card. Then it’s crucial that you close all joint accounts. Trust us; we’ve seen countless situations where one spouse runs up debts on the joint accounts and refuses to pay, dragging the other into financial ruin. Before you walk away from your marriage, make sure it’s a truly clean break by closing any accounts that have you and your spouse’s name on them.
- Divide up the debts. If possible, do this yourself, as we just suggested. If you can’t work it out, the court will do it for you. Unfortunately, the creditors with whom you have accounts will not be bound by the court’s decision. Even if the judge in a divorce court ordered your spouse to pay a particular joint debt, the creditors and collectors will still come after you if your name is still on the account. That is why it’s much better to transfer joint debts into individual accounts. It’s possible to have your name removed from a joint account that your spouse intends to keep, but it’s much safer to close the account altogether and open new accounts. The same is true of accounts where your spouse is an authorized user; you can revoke the authorization, but it’s better to start fresh with an individual account. This is also the time to look for joint accounts you may not be aware of; often one spouse will open accounts during a marriage and not tell his/her partner. Work with your divorce lawyer to pull credit reports for you and your spouse to make sure there are no secret accounts waiting to surprise you.
- Sell the house. The jointly owned home is a source of tension and financial devastation in many marriages. Our housing counselors frequently work with people who are facing foreclosure because they let their spouse keep the home only to find out the mortgage isn’t being paid. Many couples think that they should keep the family home for the sake of their children, but the risk of foreclosure is so great that it’s often better for the children to sell the home. Even if one of you does want to keep the home, you should still sell it. That is, you as a divorcing couple sells the home to the individual spouse who wants it. That individual needs to apply for a mortgage on his/her own and take over sole ownership of the property. You should never walk away from a jointly owned property where your name is still on the mortgage.
- Monitor your credit report carefully. Use annualcreditreport.com to pull your credit reports. You can get one of each of your reports per year for free, so stagger your requests. You might order your TransUnion report, wait 2 months, then order your Equifax report, etc. Watch for unfamiliar accounts; if your ex-spouse has your social security number, you may end up co-signing for accounts without your knowledge. Stay on top of this until you are sure your credit report is stable and you and your ex’s finances are permanently separated. If you need to buy a second round of credit reports within the first year, consider a combined report from a site like myFICO.com.
- If bankruptcy happens, and it often does in a divorce situation, take steps to make sure your bankruptcy is a truly fresh start. Try to file at the same time as your spouse so all the debts are truly wiped out. Find a reputable bankruptcy lawyer who isn’t also serving as your divorce lawyer. Be aware that child support is not affected by bankruptcy: that obligation will persist no matter what happens with your other debts. Finally, place a 100-word statement on your credit reports explaining that the bankruptcy was an unavoidable consequence of your divorce. You can find out more about the use of 100-word consumer statements in our “Consumer Guide to Good Credit”, which is available as a free download from our web site.
Whatever the reasons for your divorce, you should take care to enter into your single life with a good handle on your personal finances. Make the separation as clean as possible so you’re not burdened by your former spouse’s financial mistakes.
And no matter what your marital status, the best thing you can do is borrow as little as possible and work to pay down your existing debts. A lot of the pain of a divorce can be avoided if there are no debts to divide when it’s time to face the judge.