Should You Deal With Debt Before or After Divorce?
The following guest post was prepared by Eliza Collins, a personal finance writer, who regularly posts on debtsettlement.com.
Divorce is complicated enough. Add debt into the equation and it’s downright messy. What makes it even more complex is that the person whose name is on the credit card or loan agreement is the person the bank holds responsible for the debt. It doesn’t matter who made the charges, who benefitted from the debt, or who the judge determines should pay for the debt. If your name is on the agreement, the bank wants you to pay. And if your spouse files bankruptcy on a joint account, the bank will come after you.
Many people don’t think about debt until they’re already going through divorce, but it could be more helpful to tie up these loose ends before the split is final. Once the divorce is final, you’ll have to go back to court if the spouse doesn’t abide by any repayment agreement the judge ordered. In the meantime, creditors will still come after you for any payments on accounts that include your name. Your credit standing will be affected if you don’t keep up your payments.
Make an Agreement
If you and your spouse are still on good terms before the divorce, you may be able to work out some type of payment plan between the two of you. Pull both credit reports and create a list of the debts that belong to both of you. List the amount of the debt and decide who’s responsible for the debt. Try to keep it friendly. If it turns into a fight or an argument, walk away from the situation and try to approach it later.
This is an exercise that either spouse can do alone, even if the other spouse doesn’t cooperate. Create a list of all the debts you know about and decide who’s responsible for the debt. Be fair. If it’s a debt you created, own up to it. You can try emailing the list to your soon-to-be ex to get their input.
Ideally, you can your spouse can agree on your debt responsibility. From there, take steps to get rid of any joint accounts by transferring the balance to an credit card with your own name, paying off the balance, consolidating, or refinancing the amount. The goal is to enter the divorce with each spouse’s name attached to only his or her own debt.
If you can’t come to an agreement with your spouse, get your attorney involved. Your spouse may be more willing to work with your attorney and if not, both spouses’ attorneys can try to work something out.
Joint Bankruptcy is an Option
If you ultimately cannot come to an agreement or the spouse can’t afford to pay for the debt they’re responsible for, consider filing joint divorce while the two of you are still married. Most of your unsecured debt can be discharged through bankruptcy and you can proceed with the divorce without the debt hanging over your head.
Bankruptcy does have its drawbacks. For one, you’ll have to pass a means test to file Chapter 7 bankruptcy, the one that discharges your unsecured debt. Bankruptcy also stays on your credit report for up to 10 years and can affect your ability to get new credit for several years. If your spouse is considering bankruptcy, it may be better to get on board. Creditors will hold you solely responsible for paying joint accounts if your spouse files bankruptcy alone.
In a perfect situation, you can take care of the debt before the debt. After the fact, it can be a lot messier, especially if your spouse doesn’t keep up with payments they’re supposed to make.
This guest post was written by Eliza Collins, who is a personal finance writer specializing in saving strategies, alternative income and debt relief options. You can read more of her articles at the debt settlement blog.
Nothing contained in this article is intended to substitute for legal advice. It is always in your best interest to consult with an attorney if you have any questions concerning divorce, bankruptcy, or related issues.