Your Ultimate Guide to Divorce and Debt

divorce and debt

Sometimes the most emotionally trying times in life are also the ones in which you have to be the most mindful of your finances. Unfortunately, this is definitely the case during divorce.

There are few things more heartbreaking than the end of a marriage. However, divorce can also be disastrous for your finances if you’re not careful — both during and after the proceedings.

Here’s everything you need to know about divorce and debt so your finances come out unscathed.

How to handle divorce and debt responsibly

When it comes to an amicable divorce, it all depends on how well you and your soon-to-be-ex-spouse work together. The better you can work together, the easier the proceedings should be.

Either way, there’s a good chance you’ll be talking to a lawyer soon. Here are some tips to help you handle divorce and debt, including a few from financial attorney and author of “Life & Debt”, Leslie H. Tayne of Tayne Law Group P.C.

1. Tally up the debt

No matter what type of debt you both share, make sure you add it all up. This includes credit cards, student loans, mortgages, auto loans and personal loans.

According to Tayne, you should know the debt amount and whose name everything is in, as well as what the payments are and the names of the creditors.

It’s also very important that you are 100 percent honest when you’re tallying up your debts. So if you’ve been hiding any debt from your spouse, confess to it now.

Once you tally up your debt, convert it into two lists (which I’ll discuss later on):

  • List 1: Debt brought into the marriage.
  • List 2: Debt that occurred during the marriage.

2. Figure out how you’ll split up the debt

Once you and your spouse part ways, you may also want to split up your debts.

Perhaps one of you had student loans before the two of you were married. Or maybe one of you took on a debt that the other didn’t agree with at the time. Either way, it’s important that you speak with each other and decide who takes on what, debt-wise.

What’s more, if you helped your spouse pay down debt before the wedding and are looking to get your money back, think again.

According to Tayne the general rule is, “Unless you had something in writing that said it was a gift, you’re not entitled to any money back. I suggest always that you keep pre-marital debt separate and not consolidate into both names.”

It will also be important that neither of you sign on to new debt once you decide to get divorced. This new debt will fall into a category called “marital debt” and could be something you’re both on the hook for.

3. Get original copies of financial statements

As you and your future ex-spouse talk about your joint finances, make sure you both have original copies of everything for documentation and clarity.

If there aren’t enough, make copies of the originals you have and reach out to the agencies you worked with – financial or otherwise – to see if they’ll send you another set of originals. You may also be able to find some of your financial statements online.

As you sit down and go through all of your financial accounts and statements together, don’t leave any stone unturned. If you’re not sure where to begin, Bedrock Divorce Advisors has a financial checklist you can review to help you keep track of what you need to gather.

4. Don’t try to hide anything

When you’re dealing with divorce and debt, don’t hide anything. Maybe you had a loan you were hoping to pay off before your spouse found out. Or a credit card you forgot about that still carries a balance.

Remember to disclose everything – even accounts that are in collections. If you don’t disclose it to your spouse and you end up in divorce court, you’ll have to disclose it in an affidavit:

“A financial affidavit is a formal document often required during divorce litigation in which you provide details of your financial situation. Afterward, you sign the document, verifying its truthfulness, then file it with the court. Therefore, any lies, omissions or misrepresentations you may have been sworn under oath to the court, just like when you testify.” – LegalZoom

If you decide to lie on a financial affidavit during your divorce, LegalZoom states you could face repercussions ranging from a verbal reprimand from the judge to financial penalties and jail time.

While it may not be easy to admit to hidden debt, it’s probably not worth the risk.

5. Understand what “marital debt” is

Remember your two lists of debt accounts? Here’s where they come into play.

It’s important to understand that “marital debt” is all of the debt you acquired during your marriage. However, it’s not always the same as joint debt – debt that you and your partner take out in both of your names.

When it comes to marital debt, it doesn’t matter if the debt was only in your spouse’s name – you could still end up on the hook for it. It all depends on how your divorce proceedings go and the settlement you all decide upon.

To make matters more confusing, Tayne outlines how this rule applies differently based on where you’re getting divorced:

The rules of ‘marital debt’ can also be different in every state. For example, if you live in a community property state, you may have to split up your finances 50-50 after your marriage (regardless of who earned it). Laws are also different if you live in an Equitable Distribution State.

Because of the confusion, Tayne recommends understanding which laws applies to you before filing for divorce (or as soon as possible) so that you are aware of what happens with you and your partner’s finances and debt.

6. Don’t think you’re off the hook

Here’s the thing about marital debt: even if your partner agrees to pay all of it after the divorce, you’re still responsible for it if it remains in your name.

If your ex stops making payments any time after the divorce proceedings, your creditors will still hold you liable for the debt in your name. You could fight your ex in court over it, but that won’t stop the defaulted payments from hurting your credit.

Just remember this one simple rule: debt in your name will affect your credit no matter what.

Dylan Ross, CFP®, AFC®, Garrett Planning Network, explains that just because a court orders one person to become responsible for a joint debt doesn’t mean the other person is off the hook.

“A divorce order is between the formerly married couple, but a joint debt from a contract between the couple and the lender, who was not party to the divorce order, is not changed by the court’s order,” Ross says. “That also means it will continue to appear on both credit reports.”

If a debt is in your name and your spouse agrees to take it on in the divorce settlement, check the account each month to make sure those payments are being made. You’ll want to know sooner rather than later in order to avoid a default hitting your credit report.

How to make sure your divorce doesn’t lead to debt

Let’s say you get this far without any issues. There are still a few steps you should take to ensure that your divorce doesn’t suddenly lead you to debt.

1. Divorce doesn’t always have to involve lawyers

The act of getting a divorce can be incredibly expensive. A survey done by Nolo found that the respondents paid an average of $15,500 for their divorce.

If you want to avoid paying almost half of the cost of the average wedding for your divorce, you can file for an uncontested divorce. According to NYCourts.gov, an uncontested divorce occurs when:

(a) there are no disagreements between you and your spouse over any financial or divorce-related issues (i.e., child custody and support, division of marital property or spousal support); and (b) your spouse either agrees to the divorce, or fails to appear in the divorce action.

An uncontested divorce saves you time and money battling it out in the courtroom. That’s why this can be a really great way to make sure your divorce doesn’t send you both into debt. However, NYCourts.gov gives one warning about this:

“You may sue for divorce thinking that the proceeding will be uncontested, but discover later that your spouse has decided to contest (‘fight’) the case.”

If that happens, you’ll have to either represent yourself in court or have a lawyer represent you. In the end, if you fear that your spouse might take advantage of you, go ahead and work with a lawyer. After all, there can be risks with a “do it yourself” divorce.

Divorce startup WeVorce cautions risks for this type of divorce include unknowingly getting into an unfair agreement, settling too early, or slowing down the case due to lack of legal knowledge.

2. Beware tax implications of certain settlements

If you receive a settlement in your divorce, find out if there are tax implications. In other words, depending on a variety of factors such as what you receive in your settlement (especially property or assets), you may end up owing taxes on these items.

The last thing you need after a stressful life change such as divorce is to find out a year later that you’re getting hit with a huge tax bill. If you’re working with a lawyer, go over all the details of the settlement and if parts of it might be taxed so you can be prepared.

3. Make sure your spouse is paying their portion

This point is worth mentioning twice.

If your spouse has agreed in the divorce proceedings to take on some of your marital debt, make sure he or she is really paying it. Log into those accounts and check each month.

Again, your creditors will come after you if your name is on a debt that’s going into default. Don’t let this happen to you.

4. Stay on top of your credit report

Another way to make sure your divorce isn’t causing damage to your credit report is to stay on top of it. You can get your credit report from all three credit reporting bureaus for free each year through AnnualCreditReport.com.

Review the items on your credit report to make sure that they are all, in fact, things that occur in your name. Then search for any delinquencies.

Delinquencies on debt your ex agreed to take on could mean they stopped making payments. If that happens, get in touch with your ex and your creditors immediately to resolve the situation.

5. Create a rock-solid solo budget

Now that you’re starting over, you’re going to need a budget to match.

“I can’t stress enough how important it is to budget and take control of your finances post-divorce, especially if your partner has been in control of your finances your whole marriage,” Tayne explains.

If you were in charge of your budget during the marriage, this step might seem like a breeze. However, there are a million ways our finances can become tangled with our spouse’s. And we may not notice until we’re on our own again.

Tayne also mentions that many divorcees don’t think about the changes that are coming to their budgets – or how they’ll soon be living on less income. You can prevent this shock by getting ahead of it.

Start by writing a list of income and expenditures. Then create a budget to make sure what’s you’re spending doesn’t surpass what you’re bringing in.

Then create a new plan for your long-term financial goals now. Just make sure you’re planning for it and not falling into an impulse-laden financial freefall.

Divorce and debt don’t have to spell disaster

There’s no question that adding the stress of debt to the process of divorce can feel like a disastrous combination. But it doesn’t have to be that way.

Follow these 11 tips and cover all your bases so you can bring this chapter of your life to a close and move forward, stress-free.

And if you need additional help, don’t hesitate to seek legal counsel you trust. Sometimes it’s worth spending a little money to protect your future.

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