When you’re getting ready to take your relationship with a significant other to the next level, one of the most important subjects to talk about is money.
And one of the most important money subjects is debt.
The New York Fed reports that Americans carry more than $12 trillion in debt. What’s more, almost $750 billion of that debt is through credit cards. And, of course, Americans owe more than $1 trillion in student loan debt.
With so much debt floating around, there is a good chance your significant other has debt. Therefore, here’s a review of how to address debt management within your relationship and, if necessary, protect yourself going forward.
Debt management and marriage 101
Before you say “I do,” consider asking the following six questions before hitching your finances to your partner permanently.
1. Is it possible to hide debt from your spouse?
In most cases, your debt can’t be discussed with anyone who hasn’t cosigned it.
“It’s hard to hide debt from your spouse,” Detweiler explains. “If it goes into collections, a collection agency can discuss it with your spouse.”
This is true even if your spouse isn’t a cosigner. The only exception is if you live in a state that requires spousal consent.
So if you have debt and you’re thinking about getting married, it’s a good idea to come clean before you tie the knot.
Of course, it’s still possible to hide your financial sins from your partner, even if you’re married and combine finances.
According to a survey commissioned by ForbesWoman and the National Endowment for Financial Education (NEFE), 31 percent of American adults admit to lying about money.
2. Should you cosign your partner’s debt?
When you join your life to someone else’s, it’s tempting to say “what’s yours is mine — including debt.”
It’s a noble sentiment, and it can help when you’re paying off debt as a couple. But that doesn’t mean you should cosign on your partner’s debt or add your name to their debt obligations.
“Generally, debts incurred before one marries aren’t inherited by a spouse,” says Detweiler.
That changes, though, if you decide to cosign a loan or add your name to your partner’s.
“If they default on the cosigned loan, you could wind up with the full responsibility for the debt,” explains Detweiler.
This applies even after you break up. Let’s say a judge instructs your ex to keep paying on a debt. If your name is still on the loan, it’s also your responsibility, too. And, if your ex doesn’t make payments, creditors might still come after you as the cosigner.
If you break up with someone and you’re attached to any of their loans, it’s a good idea to see if you can get a cosigner release. Although it’s not always possible, it’s worth a try.
3. How will their debt cancellations affect your taxes?
Your partner’s current debt isn’t all you have to worry about, either.
Perhaps your spouse-to-be doesn’t have debt right now, but their debt was canceled in the past as part of a debt management agreement. If you marry, you need to double-check the implications of filing jointly.
“The amount they saved by settling may be reported as income,” says Detweiler. “This can affect your tax bill if you file jointly.”
Consult with a tax professional before you file your taxes and run the numbers. Look at different scenarios to ensure that your spouse’s canceled debt isn’t going to mean a bigger tax bill.
You may find that you’re better off filing separately until their canceled debt is no longer an issue.
4. Should you get joint bank accounts?
Many couples open joint bank accounts to make it easier to manage their finances together. You can also open a joint account for all types of loans, including credit cards.
And in many cases, even if one of you has debt, this doesn’t end up being a huge problem. You can use your joint bank account to pay shared bills and take care of household expenses.
Things can get ugly, however, if your significant other or spouse is sued.
“If you have joint accounts and your spouse gets a judgment against them, or has one already, it may be possible for the judgment creditor to take that money,” says Detweiler. That can include money you’ve put into that account, too.
For the most part, whether you’re married or not, a joint account means the money is equally both of yours, says Detweiler. That’s why in some cases the money you add to the joint account can be subject to the terms of a judgment against your spouse.
Therefore, if you aren’t sure about your partner’s situation, avoid opening joint bank accounts. You’ll just have to find another way to split the bills and pay attention to who’s responsible for what. But that’s better than having your money taken away because of your partner’s unpaid debts.
5. Will their debts affect your credit?
Remember, if your partner runs up big bills on a joint account, you are responsible for them just as much as your partner.
That means that if they don’t pay their bills or loans, and your name is associated with their accounts, your credit score could take a hit. Therefore, if the relationship ends, double-check your credit history to make sure things aren’t mistakenly assigned to you.
“Make sure information isn’t incorrectly commingled,” says Detweiler. “Your individual accounts shouldn’t appear on each other’s credit reports, but mistakes do happen.”
You can get a little help from the courts by adding a written statement to your credit file claiming you are no longer associated with those accounts. But there’s not much you can do if a partner runs up bills in a joint account with your name still on it and refuses to pay.
6. What about community property laws?
According to Nolo, debt acquired during a marriage is considered community debt. No matter whose name is on the account.
Essentially, you could be equally liable for debt your spouse acquires on their own — even if your name isn’t anywhere near it.
There are different rules, depending on who benefitted from the purchase. There are also formulas that can be used to determine your liability. Check your state’s community property laws to see what the rules are.
How to protect your finances (just in case)
While you may combine your finances to some degree as a couple, consider keeping some of your assets separate.
Even though my ex-husband and I had a “big pot” arrangement for most of our money, we also made it a point to keep some things separate during our marriage. We each had our own credit cards, retirement accounts, and individual bank accounts.
So, even though we did have a joint bank account, we each also had our own assets and credit resources. That way we were both protected.
In the long-run, it turned out to be a good thing. It made it easier to separate our finances when our marriage dissolved. Plus, I had peace of mind knowing that I had some of my own assets, just in case.
As you get ready to join finances with another person, consider keeping some of your money separate and potentially protecting yourself from your partner’s debts. While it’s ideal to approach debt management jointly as a couple, you never want to risk your own credit score or livelihood in the process.
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