Divorce is virtually always complicated; couples build a life together, create memories, make homes, raise children. Your lives become interconnected, and extricating yourself from that relationship is a complex process. This is especially true when there is debt involved. What happens to the mortgage? The credit card bills? The car loan? Learn about divorce and debt so you can start the next chapter of your life on secure footing.
Prepare for Debt After Divorce
As mentioned, and as you are no doubt aware, debt and divorce can feel like a tangled mess. But you can disentangle your finances from those of your ex-spouse. And it’s best to start before they officially become the “ex.” Finances should be one of the most important factors you take into consideration as you contemplate and prepare to go forward with divorce. Start by:
Assessing your debt situation.It can be tempting to put off dealing with financial matters – I’ll just do it tomorrow; I can’t face it today. But sit down and tackle it as soon as possible. Make a list of any debts – credit cards, mortgages, loans, etc. – for which you and your spouse are responsible, including the ones that you applied and signed or cosigned for.
Tip: Order a credit report. This will tell you what loans are owed, and it will become a useful tool as you start an independent life.
As your divorce proceeds, monitor your debts and save all recent account statements. If your spouse decides to make a large purchase for him or herself (e.g. a vacation on which you do not go) on a joint account, you may not be responsible for that debt.
Freezing or Closing Joint Accounts
Keep your debt from escalating further. As soon as checks clear, close or freeze your joint accounts. Make plans for any bills that are paid automatically through those accounts (e.g. if your mortgage is on auto-pay, put a stop on that and discuss with your spouse how you will both handle that bill). If the divorce is contentious, contact your financial institutions to see what your options are.
Credit cards and loans are a different beast: if you share a credit card, both of you are responsible for spending. If your spouse agrees, cancel or cut up that card. If not, carefully track all spending and save statements. Keep your own spending to a minimum.
Now, with loans, if your name is on it, you’re responsible. Even if your divorce is finalized, your ownership of the debt does not end. Even if your divorce agreement states that your spouse will handle a debt, that does not negate your responsibility. Again, be cautious and track payments.
You can try to get your name off the loan (possible but not probable), or refinance in your ex-spouse’s name only. Another option is for you and your spouse to get two separate loans and pay off the joint loan. This also has the advantage of helping you build or rebuild your credit. A divorce attorney can be an invaluable aid to you when it comes to sticky loan situations.
Building your credit.
When you close joint accounts, open your own. Remember, you want to spend conservatively, but you do need to establish your own credit. We talked about getting a separate loan to pay off a joint loan. You could also get a low-interest credit card, on which you pay your balance each month, or a car loan from your bank or credit union.
Keep monitoring debt, especially those that your ex-spouse is now responsible for paying off. As long as your name is on the loans or accounts, you are responsible for those debts also. Be sure to get online access and have all lenders send you statements and other relevant correspondence. If you cannot get off a loan or account, you must stay on top of it.
When it comes to divorce and debt, stay proactive and seek help from a trained attorney. Yes, it’s another expense, but many people find it saves them a great deal of money – and aggravation – down the road.