The Divorce and Debt Minefield
The Divorce and Debt Minefield
During the divorce process, you will be dividing not only your assets but also your debts. How you deal with debt is important and could affect you for years to come. There are several areas that need your attention. The first has to do with debt that you have acquired during the marriage. You will need to obtain a copy of your credit history to determine whether there is any derogatory information that has been reported to the various agencies. If so, you will first need to verify that the information is correct. Errors are not uncommon. Sometimes debts listed on your report may erroneously belong to someone else. For derogatory information that does potentially apply to you, you will need to review relevant copies of bills and cleared checks. If you detect any errors, they should be reported to the agencies. The agencies will investigate your questions and report their findings to you. Nevertheless, it does take considerable time to get the changes made, so it would be prudent to
obtain another report a few months later.
Not all of your personal marital debts will appear on these reports, only those for which the creditors consider you responsible. For example, if you have a joint credit card that you and your spouse have cosigned for, the payment history related to that card will appear on both your and your spouseís credit histories. However, if the credit card is in your spouseís name
and you are just an authorized user, the payment history may only appear in your spouseís name. This can be both good and bad. If the credit history is good and in both names, you will benefit from it. The opposite is true if the credit history is bad. On the other hand, if you are only an authorized user of the card, late or delinquent payments may not have a negative effect on your ability to obtain credit in the future.
If you have not established credit in your name, and your credit history has little or no information, positive or negative, you should try to establish credit while you are still married. Otherwise, it may be more difficult in the future. Letís say you eventually plan to purchase or lease a car. Not having established credit may make doing so costly or difficult. If worse comes to worse, and you find it difficult to obtain credit, it would
probably be in your best interest to obtain a secured credit card, a card that is secured by a deposit you place with the issuer.
Credit card companies should be notified immediately of your situation and joint accounts closed, if possible, because creditors will still consider you responsible for any joint debts. Although no additional debts will accumulate that are acquired by your spouse, you will still be considered responsible for previously existing debt. Because of this, it would also be in your best interests to pay off any joint debts and establish separate credit prior to the division of assets.
Very often in the divorce process, one spouse will agree to receive future payments from the other spouse because there arenít sufficient liquid assets to divide at the time of the divorce, and the division of property would otherwise uneven. This type of arrangement is not without risk, and should be avoided when possible, because your ex-spouse could fail to make timely payments or default on the agreement, perhaps even declare bankruptcy (see Pending Bankruptcy Legislation Could Impact Support Payments). While you might have some legal recourse, if you could prove that this debt was related to support rather than to the distribution of property, whether you could prevail would be decided by a bankruptcy court, litigation could be costly and time-consuming and winning your
case would not automatically imply that future payments would occur in a timely fashion. If you do agree to hold a note as part of your settlement, try to have it secured by assets belonging to your ex-spouse.
Another risk that you will face has to do with the division of any joint debt. Say for example that your ex-spouse agrees to assume certain joint debt as part of the settlement. Creditors will still consider you responsible for this debt. If your ex-spouse were to continue to use a credit card, fail to make timely payments or otherwise defaults on the debt, this could continue to haunt you forever.
More articles on credit and debt management:
Credit Card Stats
Improve Your Financial Health
Thinking of Bankruptcy
Applying for a Loan? Start by Ordering Your Credit Report
Reasons to Check Your Credit Report Regularly
More information on the financial issues in divorce:
Financial Guide to Divorce Settlement
by Carol Ann Wilson
Divorce and Money
by Violet Woodhouse and Dale Fetherling
Ernst & Young's Personal Financial Planning Guide: Take Control of Your Future and Unlock the Door to Financial Security, 2nd Edition Robert J. Garner (Editor), et. al.