For this episode, we’re talking about how to handle debts in divorce. There are lots of different kinds of debts and most of us have at least some. The biggest debt most often is the mortgage on the house (which we’ve discussed in a previous episode). Today we are focused on credit cards, IRS debt, car loans, student loans, medical debt, and loans from family members. There are some basic guidelines that apply to all these debts and there are nuances to each of them.
Normally the rule of thumb is that whoever’s name is on the debt is the person responsible for it and these debts, if they are small, can be divided up between the couple. But what happens when there is a larger debt that a couple has decided to pay off together even though only one name is on it? How does the lender relate to this negotiation between the couple?
Lisa: This is important. If a judge requires one party to pay off a debt that they are either unable to unwilling to pay, that can set both parties up for failure. Each debt needs to be looked at individually to make sure the parties are divorcing each other and their joint debts too.
If your marital agreement states that one a husband must pay off his wife’s credit card debt, for example, but he doesn’t, the creditor won’t come after the husband but the wife whose name is on the debt. She is able to seek legal recourse but if this is after the divorce has been finalized, it’s a burden (mental and financial) to return to court. To save the headache, try to get this handled before the divorce is finalized and have the debt transferred to be under the name of the person who is legally obligated to pay it.
What are the risks in a situation where, for example, a couple has a joint car loan but one spouse is taking the car and the other one is left with having to pay off their share of the loan?
If you are worried that the other party can’t or won’t pay, take whatever cash assets you can from the other spouse to help pay it off.
Make sure you are notified whenever the payments are made (and not made)
Liability – the spouse who is no longer driving the car (but still owns it in part) could be liable if something happens to the car.
The best case scenario is to take the other spouse off the loan and off the liability so you can be in complete control as the person who, in practice, owns the car.
Medical Debt – in this situation, the debt itself will be in the patient’s name (one spouse, not both). However, if the medical debt was incurred during the marriage, it is normally considered marital debt. But because it’s always in one person’s name, it’s easier to handle medical debts than some other types (car loans and mortgages, for example). And during the financial split, medical debt can be divvied between the parties to make it more equal.
What happens when the medical debt is in the name of the child? Then you back to a situation as previously mentioned where the couple needs to negotiate how they will pay off the debt between themselves. Medical debts tend to be more flexible than other lenders and will be more generous with a payment plan.
Student Loan Debt – This is another example of something that will be in individual names. Here, Lisa is discussing student loan debts held by the couple and not their children.
Was the student loan amassed during the marriage or before?
If the loan was for a post-graduate study program, did the loan go toward tuition or toward living expenses? If the answer is living expenses, you can argue that this is a marital debt that needs to be divided. If the answer is tuition, the debt belongs to the student only.
IRS/Tax Debt – Filing a joint return means a joint debt. These need to be handled on a case-by-case basis.
Be proactive in your marriage about your finances and get involved as soon as you can.
Just because you didn’t understand your finances during your marriage doesn’t mean that has to continue into divorce and your post-divorce life.
DivorceTown USA – A website dedicated to providing resources and professionals to help people going through divorce. Divorce has many layers and there isn’t one professional who can help with everything or answer all the questions.
Lisa C. Decker wants to live in a world where conflicts are handled with respect and dignity as divorcing couples work together to consciously create their new realities. She is a nationally recognized expert in the financial matters of divorce as a CDFA and RCS-D (Real Estate Collaboration Specialist in Divorce). She is the author of How to Divorce Your Spouse, Not Your Money. Her online community, DivorceTownUSA®, aims to deliver help and hope for those impacted by divorce and the professionals who serve them through a variety of signature events including Divorce Help and Hope™ seminars, workshops, and retreats. Lisa is also proud to partner with the Amicable Divorce Network to be able to offer divorcing couples more ways to divorce without breaking the bank or destroying their family.
Mandy Walker is a divorce mediator and Certified Divorce Financial Analyst® based in Boulder, Colorado. She works with individuals and couples helping them to end their relationships with dignity and respect, creating an understanding of the process and their options so they can feel confident in the decisions they’re making.