All community debt and liabilities are a necessary part of your divorce settlement. Debts include credit cards, car loans, mortgages, lines of credit, and other consumer loans. Personal guarantees made for business debts and lines of credit also need to be addressed.
All joint or individual debt acquired after marriage affects the value of your marital estate.
All joint or individual debt acquired after marriage affects the value of your marital estate. Debt reduces the gross value of the estate, impacts how the court divides property and influences how the debt will be paid after the divorce.
Managing Joint Debt
In California, a community property state, creditors can hold both spouses liable for debt incurred individually during a marriage. Assigning community debt at the time of divorce remedies this potential problem.
No creditor is concerned with a divorce judgment, and only wants to be repaid by the people who are responsible for the loan. This means that any debt incurred by both spouses during a marriage, separation, or after the divorce is their responsibility.
Joint credit cards are common among married couples, and it’s just as common for a spouse to use that card during the separation or divorce proceedings. Only that spouse should be responsible for the debt incurred, but credit card companies see both people as culprits.
While not likely, it is possible to have a creditor release the debt from the non-responsible spouse. In this situation, the court is more likely to assign the debt to the other spouse as part of the divorce ruling.
Before debt is assigned, consider what, if anything, is security for the obligation to pay that debt.
Tip: Save all receipts to prove the creditor is no longer owed money.
- If a car is security, the spouse who receives the car also receives the car’s loan payments.
- The more financially stable spouse should receive debt unsecured by property (i.e. signature load or credit card debt).
- If neither spouse has enough income to pay off a debt, the couple should agree to do so by selling assets.
- When you’re worried your spouse will not pay off a debt that could leave you unnecessarily responsible, make sure it is paid off before the divorce is finalized.
Divorce and Bankruptcy
If an ex-spouse files for bankruptcy after a divorce and he/she is responsible for paying a joint debt, the bankruptcy and divorce court have equal authority. This means the bankruptcy court has the power to release a spouse from owing that debt.
The court then releases the spouse from paying the loan, but the lender still has the ex-spouses information and will turn to him/her for debt collection. There are three options for this situation:
1. File bankruptcy
2. Pay the debt
3. Ignore the debt and have it listed on your credit history
Structuring your divorce settlement accordingly will prevent this situation from happening. Talk to your divorce attorney about drafting an agreement or court order declaring a bankruptcy court will not discharge a debtor from liens or payment duties.
Negative Value Assets
Vehicles and real estate sometimes lose value quicker than their loan can be repaid. This is often referred to as a “negative value asset.”
In divorce, it may be decided that a spouse receiving an asset also receives its debt, or the asset could be sold to reduce the debt. Options in this situation include splitting or assigning the debt to either spouse. The asset’s use could be seen as relieving the associated debt, and it really depends on your needs and the settlement’s terms.
Re-Establishing Credit After Divorce
Before the divorce process begins, request a copy of your credit report from one of the major credit reporting agencies (Experian, Trans Union, or Equifax). You then have to send them your written request, a copy of your photo ID, and a proof of residence. The agency requires a lot of information from you in order to correctly prepare the report.
When you have the credit report, you can then see what debt is outstanding. Contact each creditor for information, if necessary, and discuss which debt should be part of the divorce settlement with your attorney.
If you have a lot of credit card debt, you’re advised to prepare a worksheet for each card. Use the worksheet to determine how the cards should be handled, including the balance transfer, account closure, or debt assignment. This will ensure that you will maintain good credit standing or have the ability to work toward rebuilding your credit rating.
If credit is an issue, there are steps to take that help rebuild credit. These include:
- Opening a checking or savings account in your name. All that is needed is some proof of income, which could be from child or spousal support, employment, or assets.
- Apply for a credit card through a bank or local department store.
- Use the card every month (wisely) and pay the balances on time consistently.
If you have trouble getting approved for a credit card, don’t give up. Try depositing collateral money into your bank account for a bank-issued credit card. The bank may require you deposit money into a non-withdrawal Certificate of Deposit (CD) that accumulates interest.
Paying Off Debt
If you have trouble paying off debt, try contacting each creditor to ask for an affordable repayment schedule. In many situations, it’s also recommended you transfer high-interest credit card balances to an account with a lower monthly interest rate without annual fees.
The Consumer Credit Counseling Service (CCCS) offers free or low-cost guidance to those with credit and/or financial problems. The CCCS is a non-profit organization that aims to help analyze and manage your financial situation. Call (877)-615-6620 to find a CCCS office near you.
Pay Close Attention
Always get the facts and documents to support your allegations. Before you meet with your attorney and financial planner, organize these papers and provide copies to help them plan your case. You should also write your thoughts and come prepared with questions.
Your demands for payment and reimbursement should not be hostile. Instead, work with an attorney amicably to meet your objectives and goals.