Debt. It can be the financial monkey on your back and it gets even more complicated during divorce. Common wisdom is that you should enter into the divorce process with no or little debt. So how can you make this happen?
First, be familiar with the laws in your state for dividing debt. A lot will depend on whether you live in an equitable distribution or community property state. Generally in a community property state you can be held responsible for the debt of your spouse, even if you didn’t know about it. The law may consider it joint debt that you are both equally responsible for. In an equitable distribution state the law looks at what would be considered equitable, based on numerous factors versus what is equal.
The best scenario no matter what the law governs is for a divorcing couple to eliminate debt before or during the divorce proceedings. Here are five tips to guide you in the process.
1. Create a budget: That is, if you don’t already have one. Understanding where your money goes each month will help you identify areas where one or both of you spend the bulk of your income. Many personal finance programs now have diagnostics that can break items down by category. This gives you a big picture look at where your money is going each month.
2. Cut costs: Once you know that divorce is inevitable, look for ways to cut costs. Especially if you have joint debt that needs to be paid off. Any savings you can manage by cutting costs can then be applied to pay off joint loans, credit cards or other revolving accounts.
3. Payoff those credit cards: This can become very important, especially if the credit card is held in both names. Credit card companies will not care if you are divorced and which spouse was actually responsible for charges – they will continue to hold both individuals responsible for repayment, no matter what your final decree might say. Try and close all joint cards as soon as you separate if you are worried that your spouse might continue to charge expenses.
4. Get professional help and order a credit report: If you are really struggling as a couple to come to agreement, seek out a neutral third party to help create a plan. Even if you are on friendly terms with your spouse, order a credit report to check to see if any lines of credit have been opened in your name. You may also want to consider a credit monitoring service depending on the circumstances.
5. Handling debt left after divorce: Suppose you do decide that one spouse will be responsible for a debt but they lose their job or just decide to stop paying, what can you do? One strategy is to payoff the balance, get proof of payment and seek reimbursement through the courts. Again, protect your own credit and ability to get financing later on down the road.
You may want to consult a Certified Divorce Financial Analyst (CDFA) for more guidance. A CDFA uses his or her knowledge of tax law, asset distribution, and short- and long-term financial planning to provide assistance in working towards an equitable settlement. CDFAs educate their clients by providing a thorough knowledge and understanding of the often-complicated financial decisions.
Please note neither LPL Financial nor any of its representatives render legal advice. This information is not intended to be a substitute for specific individualized legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Michelle Cortes-Harkins, Harkins Wealth Management, LLC, 401.278.4049
Series certifications are held with, and financial planning and securities are offered through, LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.