Divorce, Debt, and Your Credit

debt and divorce; computer, gavel, and mini house on a tableIt’s no secret that divorce is expensive. There are all kinds of fees associated, not to mention the cost of a divorce attorney. Your divorce agreement may not turn out how you want it, and getting divorced may get you into debt – or add to what you already owe. So, what happens after all is said and done? Who gets what amount of debt, and how do you get out of it? What can you do to protect your credit? What does it mean for your retirement?

This quick-start guide explains what you need to know to get out of debt after divorce. We also offer guidance on what you can do to protect your credit as you move forward.

When divorce causes debt

Filing for divorce often leads to debt. You have to pay for the whole process, divide your assets and debts between the two parties, and you may also have to pay alimony and child support after it’s over. This can cause financial hardship and even affect your credit report. Here at Consolidated Credit, we are no strangers to the financial havoc of divorce. Take a look at how we helped Troy and Rebecca:


How to divide debt in a divorce

If you incurred debt during your marriage, you may have to split the debt between you and your former spouse. This depends on whether the accounts were joint accounts or only under one of your names. Also, the type of debt determines how it’s treated. Divorce affects credit card debt, student loan debt, and tax debt in varying ways.

Credit card debt and divorce

Who is responsible for credit card debt in a divorce? If you had a joint credit card, both you and your ex-spouse are equally responsible for the debt on that account. This isn’t the case with credit cards under your own names. Even if your spouse was an authorized user on your card and incurred debt, you are still responsible for that account.

Student loan debt and divorce

The way student loan debt is divided after a divorce depends on when the loans were taken out and whose name is on the paperwork. For example, if you borrowed your student loans before your marriage and they are only under your name, you will likely still be responsible for their repayment post-divorce. This is the most common situation. Sometimes, loans incurred during marriage can be a joint responsibility. This usually happens when a spouse’s credit was also used by the lender when determining the borrower’s creditworthiness.

Splitting tax debt after divorce

If you filed jointly, you will likely agree on a way to split this debt. If you filed separately, whatever is under your name is yours to pay off. In rare cases, you could qualify for innocent spouse relief from the IRS. This is extremely difficult to qualify for.

Note: Splitting debt is different in community property states like Arizona and California. Check to see if your state is a community property state. If it is, all debt incurred during the marriage is considered joint debt.

Divorce and debt: Solutions to consider

Debt after divorce doesn’t have to last forever. No matter how much debt you have, there is a path to debt relief for you.

When you call Consolidated Credit, a certified credit counselor guides you so you can find the best one of the following solutions:

Debt management program

If you qualify for a debt management program (DMP), your credit counselor will work with you to roll all your unsecured debt into a single repayment plan. They work with your creditors to lower or eliminate the interest rates applied to the debt, so you can pay off everything you owe in a more efficient way.

Debt consolidation

If you have good credit, you may decide to consolidate on your own instead of using a debt management program. You take out a loan to pay off all your existing balances, leaving only the to repay. Debt consolidation has fewer restrictions than a DMP, but can go wrong if you miss payments or rack up more debt on other credit cards.

Debt settlement

Debt settlement allows you to repay less than what you owe. Usually, this means lower monthly payments, but your credit score can take a major hit.

Bankruptcy

Filing for bankruptcy is another possible solution to get rid of post-divorce debt. It’s especially ideal if you already have a low credit score. This can give you a clean break from your divorce debt, so you can move forward faster without the burden of your divorce debt.

Take care of your debt, but don’t forget to take care of yourself

Divorce is difficult for families of all types and sizes. Although Consolidated Credit focuses on getting you out of debt, we want to emphasize that your emotional wellbeing is just as important to consider in trying times. Whether your divorce is happening now or happened a long time ago, don’t forget to care for yourself and your family first.

Protecting your credit

If a divorce is impending, it’s time to change your attitude and outlook on your credit and finances. Soon you will be on your own, usually with no one else there to share in the expenses. That means it’s up to you to organize your financial world from bank accounts to credit lines, insurance, loans and tax information.

To help you through this new and sometimes frightening experience, Consolidated Credit has put together these steps to ease the stress and make the transition as painless as possible.

Step 1. Open your own checking and savings account

If you’re just deciding on a divorce or are going through the process, strange things start to happen with money. Spouses tend to write bad checks, overspend and generally abuse their finances, especially if the separation turns nasty. By quietly opening your own accounts you can secretly start saving money for post divorce responsibilities. This gives you a head start on paying off credit card debt and other expenses you owe according to the divorce decree.

Step 2. Close joint accounts

Hopefully your spouse won’t have a problem with this because it can benefit everyone involved. The reason is, both of you are responsible for joint accounts. For example, if you keep your name on a credit card account and your soon-to-be ex-spouse goes on a spending spree with the card, you’re also responsible for paying back that money and vice-versa. Even if your divorce is settled and the decree states that your spouse must pay off that account but fails to do so, your creditor can hold you responsible for the debt.

Ways to avoid these situations vary, but one method is to close a joint account and transfer the balance to another account that’s in one spouse’s name. Of course this all has to be agreed upon as the debt is divided up and you must contact your creditor and ask to be released from the account. Also, ask the creditor to remove anyone that has “authorization” to use the card if it becomes your responsibility to pay off the debt.

If there’s no way to separate the accounts, specify in the divorce decree that your spouse must notify you if a monthly payment is going to be missed. This way you can hopefully make the payment and prevent damage done to your credit.

Things change if you live in a community property state. In community property states, such as California and Arizona, any debts acquired during the marriage and within those states are considered jointly owned. Check the link above for further details.

Step 3. Order your credit report

As a matter of fact, order all three credit reports from Equifax, Experian and TransUnion for free once a year at Annual Credit Report.com. Take a close look at your report to make sure there are no errors. You can find more information about identifying errors in your credit reports and the process to get them corrected in our comprehensive Credit Repair section.

Remember, you are still responsible for all joint accounts and if your ex-spouse missed payments lenders will record the negative information on your report. As a result, your credit score can be damaged, hindering you from opening new individual accounts once the divorce is over.

Step 4. Build a new budget

Now that you don’t have a spouse chipping in to pay the monthly bills, it’s time to adjust your budget to fit your new lifestyle. First evaluate your income sources and decide if you need to get a second job or cut expenses.

If your budget isn’t balanced because of the lost income, cutting expenses can help you get your financial world in order. You can save money by moving to a smaller home or trading in your car for a less expensive one. You can cut expenses by getting rid of cable or adjusting your food budget because you have less people in the house or you can eliminate discretionary expenses simply by not going out to dinner, or cancelling a gym membership.

Step 5. Establish your own credit

In order to establish your own credit, you must first pay off all debt you owe according to the divorce decree. That means making timely payments each month and not missing payments. If you can qualify for a credit card apply for a low limit card in your name and start slowly. Only charge what you need. Remember, every late payment ends up on your credit report as negative information.

If you don’t qualify for a regular card, get a secured credit card. You need to pay for the amount of your credit limit by putting money into an account. For example, if you put up $300, your credit limit will be $300. By charging items and paying on time you’ll be proving that you are a dependable credit manager. This method takes time and patience because creditors are a wary bunch, but it’s an excellent way to re-launch your credit-building pursuits.

Don’t wait to ask for help

If you are falling hopelessly in debt after a divorce, want advice on better money management skills or just need help getting your finances in order call Consolidated Credit at 1-888-294-3130 or complete a request for a free Debt & Budget Analysis.