When we're arguing about who gets custody of the cat and worrying about finding new living quarters, it's easy to forget divorce is the dismantling of a financial entity, not much different from ending a business partnership, though typically loaded with emotions.
As with any financial transaction, it's best to come in with the right information -- and a clear head.
The financial issues of divorce deal with dividing assets and liabilities, or simply put, who gets what and how to handle the Amex bill. In most community property states, assets and liabilities accrued during a marriage that are not separate property, trusts, inheritances, are jointly held by both spouses. Since laws vary per state and per your situation, it's best to contact a divorce attorney in your area.
In general, most divorce professionals would advise ending the joint debt relationship post divorce. But, just how do you go about getting rid of that debt at the same time your incomes are no longer pooled, perhaps you're looking for a job, and you've got the expenses of lawyers and other experts, as well as setting up a new household?
We've asked a few financial experts for tips on dealing with debt during divorce.
1. Split Custody of the Credit Cards. Los Angeles attorney and Certified Family Law Specialist Steve Mindel, managing partner at Feinberg, Mindel, Brandt, & Klein, says couples should divide up the credit cards. "You take the Amex and Bloomingdale's; I'll take the Citibank and Nordstroms." Pull a credit report so you can check outstanding joint debt.
2. Talk with a Financial Advisor or Accountant. Divorce may involve a number of financial decisions. When you liquidate assets like a house or IRA distributions, you'll need to determine whether it's best to use the proceeds to pay off high-interest credit cards or leave the money where it is and continue to pay monthly. You may take a beating, but you'll have cash. You can also consult the Better Business Bureau to find nonprofit debt review entities.
3. Create a Strategy. Westcott Capital's Gregg Schoenberg believes in debt segmentation to get control over finances. Different expenses require different strategies. Consider a short term loan for large purchases. "You wouldn't buy a house on a credit card," adds Schoenberg. "If you have a specific expenditure like moving expenses, furniture or medical bills, a term loan may make sense. But traditional banks don't like to lend money to people who actually need the money. Marketplace loans are absolutely good for debt consolidation. The idea of paying significantly less than credit cards charge each month can make very good financial sense," says Schoenberg, who is also the Executive Chairman of the online peer to peer lending site Peerform.
4. Remember the Mortgage May Also Be a Jointly Held Debt. Many couples choose to sell the family home and divvy up any equity. However, if you decide one spouse should buy out the other, the partner remaining in the house should take the other spouse's name off the title and the mortgage, which may require refinancing the mortgage.
Neena Vlamis, co-founder and President of Chicago's A & N Mortgage Services, Inc. says even if a woman is re-entering the workforce after years at home, she may be able to refinance in her name, provided the agreement says she will receive alimony and child support for at least three years, among other variables. Title insurance can ensure the former spouse's name is no longer on the title.
Moving forward post-divorce may require scaling back expenses to match income. Mike Cardoza, family law expert and author of The Secret World of Debt Collection says, “Don’t count 100 percent on child support or maintenance, which may be late. You may need to save money to sue for enforcement of payments. If you work for $25,000 a year and have child support and maintenance on top of that, aim for disposable income of $300-500 per month.”
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