How would you address your debts in a divorce?
In today’s economy, debt is becoming a greater concern for couples, particularly for couples facing divorce. Most commonly couples incur debt through the use of credit cards, student loans, car loans, and medical bills. In a divorce, the question becomes, who will pay for it? Neither party wants to be burdened with debt during such an unpleasant point in their lives. Yet it is something that will haunt the parties for years if it is not addressed. The Final Decree should set out the division of debt, even if only to set out the parties’ understanding of it.
In most uncontested divorces, the Final Decree of Divorce contains a standard provision that states that each party takes the debt that is secured by the property he or she receives (i.e., if you get the car, you get the car payments, too) as well as any other miscellaneous debt in that person’s name. This simple language may be sufficient for some, but not all cases. For example, a letter of assignment does not always work, and a quitclaim deed usually has no value. And what if there is a debt in both spouses’ names? Therefore, you should carefully consider whether debt needs to be addressed in your Final Decree. Below are some tips to keep in mind:
1) Contact the creditor. Ask the creditor who they believe is responsible for the loan and who is listed on the contract. Explain to them that you are in the process of a divorce. You may be able to negotiate with them to remove or reduce your or your spouse’s liability. However, once the debt is assigned to a particular party, the best practice is to notify the creditor in writing that that spouse has been assigned certain liabilities in the divorce. This can include a request that you be informed of any default or penalty by the other party. Although this request might not change your liability for the debt, it will help ensure that you are properly notified of any impending default.
2) Pull your credit reports and have your spouse do the same. (Free annual credit reports can be obtained from the federal government website www.annualcreditreport.com.) Exchange the reports and review them in detail. Address any questionable entries and be sure you understand them. Bring all debt to the negotiating table and divide it up, pay it off, shift some assets around…whatever it takes. Just be sure to resolve all debts before finalizing.
3) Bring all credit cards to the table. It can be a pain to list every card, but it can be worth the trouble. If credit cards are listed and divided in the Final Decree, you make a stronger case for enforcing that division later on if there is a problem. Also, cancel every card right before or after the divorce, regardless of whose name it is in, and get confirmation of such closure from the company. Transfer any outstanding balances to new cards, or better yet, pay them off completely before the divorce is final. Be sure your spouse does not have account access to the new cards.
4) For mortgages, it is usually best to sell or refinance the house. However, if one party wants to remain in the house but cannot refinance, be aware that if that party fails to pay the mortgage later on, the consequences can be financially devastating to both parties, even years later. As a measure of some protection, be sure to have the party who remains in the house execute a deed of trust to secure the assumption to the other party.
5) Bring a certified financial planner into the divorce, either as a consultant or during settlement negotiations. A CFP can explain the financial consequences of your decisions better than most family law attorneys can.
6) For homemakers who find themselves going back into the workforce, start building credit, even before the divorce is finalized. Open a bank account and get a credit card with a low limit. Spend a nominal amount on the credit card, but be sure to pay it off each month and on time.
7) If you are considering (re)marriage, it may be wise to get a full financial disclosure from your future spouse before the marriage. It is not always a comfortable subject to bring up, but it can be a good idea that saves you a great deal heartache down the road.
Jeff Landers of Bedrock Divorce also has some tips and suggestions on his blog. Check out the blog HERE.
To learn more, please contact our office at www.FamilyLawDFW.com.