Handling your debts in the divorce can break you financially if handled incorrectly. Most individuals we meet are more concerned about the asset (property) side of the equation and often overlook the liability (debt) side of the equation. Divorce settlement proceedings often break down when it comes to dividing up the debt in a fair and equitable manner. It is imperative that you have a clear understanding of what you owe individually and jointly when you start the divorce process. How you handle your debts during your divorce can make a big impact on your credit long after the two of you separated.
What Determines How Your Debts are Split?
Did you have a prenuptial agreement in affect that spells out how debts would be split? If not, you will need to consider the laws of the state that you reside in for dividing your debts and assets. Certain states will consider which assets and debts each of the parties brought into the marriage and which assets and debts they took on during the marriage. If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), everything that is acquired or owed during the marriage is considered equal. That means if your spouse took on a credit card without your knowledge, you would still be liable for paying that credit card even though your name is not on the account.
How Do I Handle Joint Debts?
When you are married and you apply for credit together, each of you is agreeing that you are responsible for that debt. While splitting debt in your divorce decree is part of a settlement process, the credit companies are not bound by the divorce decree and still view the debt as jointly owned. For example, if you have 2 credit cards (Visa owed $1,000, MasterCard owed $1,000) that you split during your divorce, you agree to pay off Visa for $1,000 and your spouse agrees to pay off MasterCard for $1,000. Six months after the divorce, you ex-spouse stops paying the MasterCard, you would be liable for the remaining balance. You attorney will probably advise you to have an indemnity clause in your decree if either spouse defaults on joint debt. However, this only gives you the right to go after your ex-spouse for the amount owed (usually through court) which will cost more money. Plus, the indemnity clause is not binding to third parties like the credit card company. It is best to get rid of joint debts prior to the divorce. If you agree to split a jointly owed debt, make sure that the payments are being made in a timely manner or your credit score is going to take a hit. If the payments are not being made, make the payments and keep a record so that you can get these payments back from your ex-spouse through the indemnity clause.
Strategies for Splitting Joint Debt
As you can see from the example above, this scenario can turn into a nightmare. If you have an account that goes into default, you have the potential of having your credit score impacted negatively for up to seven years! We advise our clients that have joint accounts to ask the creditor to convert the accounts to individual accounts. For more advice related to handling your debts in divorce, please download our ebook:
