Managing Debt During a Divorce
- January 24, 2023
If you are facing a divorce, there are likely many concerns running through your mind. Aside from the emotional toll, dealing with debt and divorce can also weigh heavily on anyone.
Handling debt during a divorce can potentially impact your finances. That’s because your marital assets – jointly held debt – can be divided between you and your spouse. Managing debt during a divorce means understanding every aspect of the process.
Every divorce is different, and there’s no one-size-fits-all solution.
How do I manage debts during a divorce?
We’ll start off by noting that this information is for general guidance only – it is not legal advice.
A divorce does not negate responsibility for debt. You are still responsible for paying any debts you have. There is jointly held debt and personal debt. You don’t receive a grace period with creditors simply because of your personal situation. Start planning as soon as possible. Paying off debt during a divorce should remain as important as purely legal matters.
Here are some tips to consider from the start of the divorce process:
- Be realistic about your money situation. While it may be tempting to use your divorce as an opportunity to spend money you don’t have, remember you already have responsibilities to juggle.
- Begin tracking your finances. All of the data you collect will be helpful as you plan on handling debt during a divorce and after. Knowing your debt amount, payment schedules, and interest rates will help you make better decisions about how to manage your finances and not make risky financial decisions.
What laws regulate debt during a divorce?
Each state has its own laws related to debt and divorce. Have an attorney examine every aspect of your divorce. There are key distinctions related to whether debt was incurred before, or during the marriage.
Debt incurred in one person’s name before marriage or after the date of separation is considered “separate debt” and typically is not subject to division during divorce.
We’re going to focus on one commonly-known situation related to debt and divorce. A prenuptial agreement is made before the marriage. In this type of contract, the couple decides how assets should be divided if the marriage ends.
Another law related to debt and divorce is “equitable distribution.” In this instance, a judge divides marital assets and debts evenly. If your divorce is based on an equitable distribution, your spouse will likely have to pay off your debt before the divorce settles. Jointly held debt should be proactively considered, regardless of how your divorce is structured.
Does a divorce impact my credit score?
While your marital status does not appear on credit reports, your credit score can be affected by financial decisions during your marriage.
Handling debt during a divorce will keep your finances on track in the long term. Any penalties from late payments can affect yours and your spouse’s credit scores. Be proactive early so your credit score is not impacted. Stop using joint credit cards and close joint accounts. Work to remove your name from any joint credit cards or remove yourself as an account cosigner. It is also a good idea to track spending activity on any joint accounts to be able to show who incurred the debt.
Paying off debt during a divorce can become complicated. To minimize the impact on your credit score, continue to make timely payments on debt. Also consider refinancing existing loan(s) to clarify who will be responsible for that debt.
A divorce doesn’t have any significant impact on your credit score. However, there is a chance your FICO score will be affected if you have a lot of late or unpaid debt. Your FICO score can affect other aspects of your life. Your income, savings, and insurance premiums can all be affected by your credit score.
How credit card debt from your marriage is handled in divorce can differ depending on where you live. Some states consider debt from a marriage as ”common law property” or “community property.” When treated as common law property, the spouse who incurred a debt is responsible for repaying it. When treated as community property, both spouses are responsible for debt incurred during the marriage.
There are 41 states across the country that follow common law. In Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin community property rules.
Handling debt during a divorce means looking at all aspects of your finances, including your credit. Consumers are entitled to a free credit report from all three credit reporting agencies (Equifax, Transunion, and Experian) every 12 months. You can access your free reports online at AnnualCreditReport.com.
What do I need to know about jointly held debt?
One of the challenges many people face with debt and divorce is jointly held debt. Both spouses are responsible for jointly held debt. This means if one spouse stops making payments, you are both liable. If you are unable to pay off debt, your credit may suffer. Speak to the lender to find out what help is available to you.
Jointly held debt can be very challenging in deciding who should pay what amount of money. If you and your spouse have jointly held debt, you may have to work with them to make sure everyone is treated fairly and that each person takes responsibility for those debts as agreed.
This may mean having to work out an agreement and divide up what is owed. To decide how to approach jointly held debt, keep the following in mind:
- Be clear. Make sure you are both clear whether the debt is jointly owned or if it is solely owned by one person. In some situations, it may be more beneficial to transfer the debt to your name, even if it is only a small amount.
- How will the debt be paid? Some debts are paid off regularly and are handled as an expense that is deducted from your monthly budget. Other debts are handled differently, such as by borrowing money and paying off the loan later.
- Know how your financial situation is impacted. A low-interest debt may not have a significant impact on your financial situation (as long as payments are current). High-interest rate debt, like a mortgage or loan may impact your finances more.
- Make a plan. The big three here are to separate joint accounts; open accounts under your own name; and establish your own personal budget. If you need help setting up a personal budget, GreenPath offers guidance, financial calculators, and other tools to help.
Should I freeze my debt during a divorce?
Freezing your credit can be a tool in managing debt during a divorce, but be clear about the impacts to your situation. Doing this means you cannot open new accounts in your name for a period of time. This process can protect your credit score.
To place a freeze on your credit, contact each of the three national credit reporting companies mentioned earlier. They will ask for information, like your name, social security number, and date of birth. Contact each bureau to see how they handle freezing your credit file (i.e., Experian).
What happens to my credit history during divorce?
If you go through a divorce and don’t have the financial resources to manage your debt, it could hurt your credit score. This is because credit scores take into account your payment history, and not paying off debt during a divorce could impact you negatively. Consider working with a financial professional to help you sort your finances out.
Try to pay down as much debt as possible. Make efforts to submit payments on time to avoid damage to your credit score. Handling debt during a divorce means taking responsibility and being proactive.
What other factors should I consider when it comes to debt and divorce?
Be sure to team with a reputable legal resource. Paying off debt during a divorce requires planning even before the actual process begins. Hire professionals to help you along the way, including an attorney to make sure everything is covered legally and your financial house stays in order. If you need help with budgeting and understanding debt, contact GreenPath Financial Wellness. Having a qualified debt counselor available can be an excellent resource.
What resources are available for handling debt during a divorce?
- Don’t ignore your debt. Make sure you deal with debt and divorce responsibly. This is important even if there isn’t an impact on your finances.
- Keep track of your finances. This is one of the best ways to protect your credit score. This means making sure that you are monitoring your spending and that you are paying off any debts that you have.
- Adhering to a budget is a good way to keep your finances on track. If you need help creating one, contact GreenPath.
Guidance from a Trusted Resource
Transitions can be overwhelming and making significant changes to your (financial) lifestyle is never easy. Whether it’s understanding your income, expenses, and assets or creating a budget, getting trusted information can be helpful.
While GreenPath does not provide legal guidance, our team is ready to help uncover options when it comes to finances and budgeting for divorcees. Our certified counselors work with people every day to recover from financial setbacks and can help you create a plan. Contact a trusted non-profit financial counseling agency like GreenPath for a free initial financial assessment.
Julie Rogier (She/Her)
With a multi-decade career in communications, Julie Rogier serves on GreenPath’s content marketing team. She has presented on financial wellness for groups including the 2021 and 2022 Financial Services Midwest Summit, and regularly writes about financial health and wellness for several publications including U.S. News and World Report.
The information shared here is an overview based on general guidance about financial matters. Getting specific legal advice is important and is not the intention of this article. As you look for tips to manage debt before getting divorced, remember to speak with an attorney.
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