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How is Debt Divided in Divorce?

posted by admin 12:08 PM
Wednesday, July 20, 2011

Everyone seems to understand that divorce involves the division of marital property and assets.

However, over the years, I have found that many people fail to fully appreciate that divorce involves the division of debt, as well.

Ironically, debt is typically cited as one of the top reasons couples split up. But, getting divorced doesn’t make those troublesome debt problems “magically” disappear. In fact, it’s exactly the opposite. Just as debt can often play a major role in the failure of a marriage, it can also play a major role in adding stress and contention to divorce proceedings.

What can you do minimize nasty debt headaches during your divorce? My best advice is to be prepared. Educate yourself about debt, in a broad sense. Then, gather all the relevant data about your specific case.  You’ll want to collect credit card bills, information from your mortgage/home equity/auto loan accounts, etc. and learn all you can about what you and your spouse owe.

In addition, here are a few tips to help you better understand how to handle dividing debt in your divorce:

1. Where you live impacts how debt will be divided. Divorce laws differ from state to state, and how your debt will be divided depends largely on where you live and whether you live in a Community Property State or an Equitable Distribution State.

There are nine Community Property States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Couples living in Alaska can “opt in” for community property, and Puerto Rico is a community property jurisdiction.

The remaining 41 states are known as Equitable Distribution States (or Common Law States).

(An earlier post discusses the differences between Community Property States and Equitable Distribution States in more detail.)

In general terms, if you live in an Equitable Distribution State, debt that’s incurred during a marriage is the joint responsibility of both parties, provided both parties are co-signers on the account (mortgage, credit card, etc.). In other words, if your husband opened a credit card account in his name only, then only he is responsible for that debt.

In Community Property States, both spouses are responsible, even if only one incurred the debt.

Of course, once you and your husband have separated, the rules change. Any debt incurred after you separate is the sole responsibility of the person who made the charges. The wrinkle here is that “the moment of separation” varies from state to state. In some states, you need to legally declare a separation. In others, a legal separation is not required; you’re separated once you start living apart.

2. It’s often best to eliminate shared debt. Our firm usually advises women to eliminate shared debt before the divorce is final. Naturally, that may mean you need to use marital assets to jointly pay off what you owe –but, usually that’s a worthwhile step, if it means you can begin your single life with a fresh start. Alternatively, some couples decide to divide and transfer their debts, so that each person is individually responsible only for his or her portion.

Either way, the goal is to separate your finances (and any remaining debt) from your husband’s finances (and any of his remaining debt).  As a result, you’ll remove your liability for what he owes.

If possible, you’ll also want to close joint credit cards and eliminate your husband as an authorized used on any credit cards in your name. Remember: Credit card companies and other third party agents are not bound by divorce agreements.  It may sound harsh, but if your names are both on a credit card account, the credit card company can hold you responsible if your ex rings up a balance and then decides not to pay.

One word of caution here:  New federal regulations are making it harder than ever for women with little or no income to establish credit on their own. You’ll need to proceed with caution as you set out to establish credit in your own name . . . Which brings up my third point . . .

3. Protect your credit. Once you have: a) established control of your own debt and b) separated your liability from your husband’s debt, it’s time to turn the page and begin a new chapter. You’ll need to establish credit in your own name –and then, once that credit is established, you’ll need to work hard to protect it. Start slowly and proceed with caution, keeping a careful watch on credit card balances, debit and ATM cards, etc.

A good first step should be to create a budget that will allow you to maintain your lifestyle, pay off any remaining debt and increase your savings. A divorce financial planner can help you determine how to manage your assets and which adjustments are necessary for continued financial stability.

All articles/blog posts are for informational purposes only, and  do not constitute legal advice. If you require legal advice, retain a  lawyer licensed in your jurisdiction. The opinions expressed are solely  those of the author, who is not an attorney.

 

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Legal Separation Agreements Should Be Carefully Drafted

posted by admin 10:00 AM
Tuesday, March 29, 2011

Some couples choose to live separately before actually getting divorced. The most common reason for this is to allow the couple to live apart while they decide if they actually want to get divorced. However, there are several financial reasons why a couple may choose to separate rather than divorce right away.

They include:

• The need to remain married in order to meet the 10-year requirement for social security benefits.

• The ability to continue receiving health insurance benefits under their husband’s plan.

• The potential tax benefits of filing their taxes jointly (see our article on the risks of filing jointly).

• Retaining certain military benefits.

If you decide that you are going to live apart, you should consider a Legal Separation Agreement. A legal separation agreement is a legally binding agreement between you and your husband that resolves issues like the division of assets and debt, alimony/spousal support, child support and visitation.

In some states, a legal separation is a necessary step to file for a divorce. In others, a legal separation is not recognized. It is important to get the advice of a divorce attorney in your state to determine if this is an option for you.

Some people remain separated for months or even years, so it is very important that you protect yourself upfront and have all the necessary issues settled and agreed to in writing. It is difficult to move on with your life without getting issues like who gets what assets and who is responsible for debts resolved. Having the legal separation in place will allow you to move forward.

Being legally separated does not mean that you must ultimately divorce, but it does allow you to get an accurate picture of what life would be like if you do divorce. Also, if you do divorce, the legal separation agreement will be used as the basis for your divorce settlement agreement. Therefore, it is important to bring in a divorce financial advisor, just as you would for a divorce, to ensure that you will have a financially secure future.

All content on this site/blog is for informational purposes only, and does not constitute legal advice. 
If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are 
solely those of the author, who is not an attorney.
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