Debt and Divorce: Smart Ways to Protect Your Assets Before the Settlement Begins
Do we marry for love or money? We sure hope it’s for love! Marriages are difficult enough, but money matters are considered one of the major factors in causing couples stress. One thing for sure is, we don’t divorce for love. The question that many people have is, “What happens to our debt when we divorce?” Simply put, you may both own a house in the same way that you both own your debt. It may be considered communal property that must be honored.
Try to pay off debts before the divorce goes through. Having no shared debts means that you can have a clean financial break from your spouse. You are in a risky situation if your name is still attached to a loan that you jointly applied for. It’s best to be amicable about your finances (at least) and work together to reduce your communal debt load before filing for divorce. If you are separating for a term, be sure to be transparent about the spending that occurs during that time as well. Accumulated debt in the separation period could still be considered communal debt if, for example, both parties remain co-signed for a joint credit card. Suddenly, your spouse’s quick trip to Belize may end up on your credit report for the next five years.
Determine Who Is Responsible for the Debt
During the settlement negotiations, it’s entirely possible for there to be an adjustment as to which party is to assume more of the debt repayment responsibility, if you can’t pay it all off before. The courts can be of help in determining levels of responsibility. It can be determined who incurred the greater amount of the debt and then weighed against who benefited the most from the debt. While this might make sense for individualized purchases like tooth whitening or one spouse’s wardrobe, co-signing for a house is a different matter. Secured debt (like houses) will be divided based upon the value of the asset offset by the debt. Unsecured debt can mean each spouse is responsible for half of the debt. Know which assets are which before you proceed.
Lenders Don’t Recognize Divorce Court Orders
Whether you’re together or not, a lender’s main concern is getting the return on the loan. If an ex-spouse defaults on debt repayment, the onus will still fall on the other partner. Prenuptial agreements are normally considered unromantic and are generally associated with protecting one partner’s wealth from being co-opted by the other, less wealthy partner. In this day and age, however, prenuptial agreements can be drawn up to protect against a partner’s pre-existing debt load. While this is equally as unromantic, it is becoming more and more the modern-day necessity than you might think.
Depending on the state in which you live, you may be subject to either community property or equitable distribution rules. This means communal property (and debt) can be either forcibly shared equally (or not) by both parties (even if they didn’t co-sign for the loan). Part of the prenup may be to address what will happen to community property and debt if the marriage fails. After all is said and done, divorce is just as major a life change as dealing with debt. If only there were a way to divorce from our debt, more marriages might survive.
We sincerely hope you won’t have to use the information in this article, but if divorce is inevitable, we hope it helps.