When most people think of money in the context of divorce, they imagine two spouses fighting over bank accounts, investments, and other liquid assets. Seldom does anyone consider the couple’s debt. Given that many couples have so much debt that their net worth is literally less than zero, it’s arguably more important to discuss than the division of assets.
Debt can cause serious financial problems for divorcing spouses. Worse, the problems don’t simply vanish after a marriage has been dissolved. They continue to hang over the spouses’ heads, sometimes for years.
This article will present a simple 5-step plan to address the debt you and your spouse owe at the time you decide to get divorced. By taking the following steps, you can minimize its impact as you get your life back on track.
Step 1: Cancel Your Joint Credit-Related Accounts
Before you do anything else, identify all credit-related accounts that list both you and your spouse. That includes credit cards, department store cards, and even gas cards. Close the accounts immediately. That is the only way to ensure that your future ex-spouse can’t charge purchases for which you’ll be responsible.
It’s not enough to cut up the cards. Not only can new cards by ordered, but they’re not even necessary for buying items online. Close the accounts and let your spouse know that you’ve done so.
Step 2: Figure Out How Much Debt You Owe
You can’t deal with debt objectively unless you know how much you owe. Once you’ve calculated the amount, you and your future ex can discuss how to split it.
Don’t rely on paper statements sent by credit card issuers and department stores. Big purchases can be made while the statements are in the mail. Either look at your balances online or contact the credit bureaus for an updated credit report. You may find that your name is listed on unfamiliar accounts with large balances owed.
Step 3: Split The Debt With Your Spouse
Once you’ve identified the total debt owed jointly by you and your spouse, discuss how to split it. The amount doesn’t have to be divided equally, although that is an option. Many couples split their debts based on which spouse purchased which items. Some spouses agree to take full responsibility for the balances in exchange for certain assets. Other couples pay off their balances immediately to give them one less thing to worry about during the settlement negotiations.
It’s important to note that couples who choose not to pay off their debts immediately are exposed to risk. If the party responsible for making payments fails to do so, creditors will come after the other person. They are not bound by the terms of a divorce settlement.
Step 4: Determine If You Need To File For Bankruptcy
Although bankruptcy is an unsavory option, it is worth considering if you and your spouse are carrying a substantial amount of consumer debt. Filing for Chapter 7 will wipe most of it out. That can give you a fresh start. Keep in mind, it will damage your credit score.
The biggest mistake divorcing couples make when they consider bankruptcy is holding off until after their divorce has been finalized. The problem is that if one party files for Chapter 7 after the divorce, the debt he or she was paying becomes the responsibility of the other person. That often causes the latter individual to file Chapter 7 as well.
If bankruptcy is on the table, it’s usually advisable to file jointly while the marriage is still in effect.
Step 5: Avoid Accruing More Debt
Assuming you don’t file for bankruptcy, you’ll likely emerge from your divorce responsible for paying off some degree of debt. The important thing is that you avoid adding to the burden. Divorce is difficult enough financially without the added concern of servicing large credit balances.
Commit to using your credit cards only for emergencies. At the same time, try to pay off the balances as quickly as possible. If you’re in dire financial straits, call your creditors. You may be able to negotiate lower interest rates on your accounts. Lower rates can help you to pay off the balances sooner.
To recap, debt is one of the biggest problems facing divorcing couples. Take the 5 steps above to minimize its influence on your life as you try to put your divorce and past marriage behind you.