Get Out of Debt Guy - Steve Rhode

Making a Clean Financial Break at Divorce

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If you’re going through a divorce, you’re probably exhausted by the emotional upheaval and the day-to-day details of carving out a new, separate life.

One thing that’s easily overlooked — or outright ignored — in the turmoil of divorce is what your financial picture will look like down the road. Some people just want out of their marriage as quickly as possible and don’t consider the financial ramifications of their actions. But you need to slow down some and look to the future. No doubt your financial life has been intertwined with your spouse’s during your marriage. Perhaps financial struggles even contributed to the end of your marriage — that’s not unusual. While it’s not always possible to sever the financial cord with your soon-to-be-ex-spouse completely (particularly if you have children), if it is at all possible to make a clean break when dividing the property and allocating the debts, do so. If you stay connected to your ex-spouse financially, you’re at risk.

Dividing Property

At divorce, some basic rules apply in dividing marital property. First of all, you are entitled to divide your property any way you want. It really doesn’t matter what the laws of your state say. They apply only if you and your spouse can’t agree on the division of property and take your dispute to court for a judge to decide. Otherwise, you’re free to divide your property in the way that makes sense for the two of you.

But let’s say you can’t agree and do fight it out in court, or you just want to know how a judge would decide things if you can’t work it out. Then the judge will make a decision based on the rules of your state. Often state rules follow these guidelines:

No matter who decides how the property will be divided — you and your spouse or a judge — often, one spouse keeps more property than the other and agrees to make up the difference by making one or more cash payments. These payments are sometimes paid over time. More often, the money is paid down the road, a few months or even years, in a lump sum after the sale of a house or other valuable asset. This agreement works well in theory, but if you’re the one expecting payments, make sure your divorce agreement doesn’t leave you vulnerable.

For example, your ex might not make the payments — perhaps out of spite or perhaps because of the lack of money due to a layoff or illness. How will you collect? Sue your ex Hire a collection agency? Try to re-open your divorce case?

Perhaps you had the foresight to have your ex sign a promissory note (secured by some property your ex keeps, such as the house) agreeing to pay you. If your ex doesn’t pay, at least you’d get your share when your ex sells the house or refinances it. But what happens if your ex files for bankruptcy and asks that the promissory note be wiped out? You may be able to protect yourself in advance by specifying in your divorce agreement that the payments are made “in lieu of” alimony or child support, neither of which can be wiped out in bankruptcy. Or you might be able to protect yourself by including an agreement in your divorce settlement that essentially prohibits your spouse from wiping out the debt in bankruptcy. Unfortunately for you, neither of these is foolproof, in which case you’d probably have to spend the time and money fighting the bankruptcy case in court, trying to convince a judge that the detriment to you would outweigh any benefit your ex would get by wiping out the debt. Don’t count on winning.

There’s only one sure way of protecting yourself — cash in hand at the time of the divorce. If your ex will pay you out of the sale proceeds of an asset, wait until the sale is final, take the money and then finalize your divorce.

Dividing Debts

Allocating debts can be just as tricky, with a similar set of rules. Again, you can allocate your debts any way you want. A judge will apply your state rules only if you can’t agree on your own and ask a judge to settle the matter. The typical rules are:

In community property states, a married person filling out a credit card or loan application alone is asked to indicate his or her marital status. If you check off “married” and don’t assertively state something like, “but I intend that this be my separate debt and I, alone, am responsible for this account,” then the creditor has the right to go after both spouses for payment — even though the account is in just one person’s name. This means that all community property and both spouse’s separate property might be at risk of being grabbed to pay all community debts incurred by either spouse.

Your divorce agreement doesn’t change your existing obligations to your creditors. So even if your ex agrees to pay the bills as a part of your divorce settlement or was ordered to do so in a divorce decree signed by a judge, the agreement or decree is binding on you and your ex alone. If your ex gets laid off or refuses to pay, the creditors may come after you for payment. If you refuse to pay on the grounds that the debts “belong” to your exspouse, your credit will be damaged and the creditors may sue you. If you do pay the bills, your only remedy is to try and get your ex to reimburse you. In rare instances you might find a judge who would re-open your divorce settlement or decree to award you a greater degree of property, but even so, good luck finding your ex-spouse in order to actually get the property.

If your ex files for bankruptcy to wipe out the debts, you could raise in the bankruptcy court the kinds of objections mentioned earlier.

Again, the advice is simple: sever financial ties if you can, especially regarding debts. Don’t divide them. Pay them off. Sell assets (including the house) to take care of the bills. If getting rid of the debts isn’t possible, then you should agree to pay them in exchange for keeping a greater amount of the marital property. Only as a last resort should you agree to let your spouse pay the debts. You can’t be sure he or she will. If this is your only choice, be sure to have your agreement reviewed by a lawyer with expertise in both family law and bankruptcy law who can make the agreement as foolproof as possible. But remember that nothing is guaranteed. Keep your fingers crossed and hope your ex makes good on the obligations.

Divorce Checklist

Just cutting up your card and tossing it in the trash will not close the account. The safest way to close a credit card account is by sending a certified letter, return receipt requested, to the customer service department of the card issuer. Ask the card issuer to close your account and to report your account to credit bureaus as “closed by consumer.” You can close your account even if you haven’t paid off the balance — the card issuer will close your account but still send you your monthly statements until you pay it off in full. But beware, I recently discovered that some creditors are raising the percentage rates to the highest rates possible on closed accounts with unpaid balances. In approximately 10 days, the card issuer should send you a letter confirming that your account is “closed by the consumer.” If you don’t receive the confirmation letter, follow up by calling the card issuer to make sure it closed your card and is reporting it properly to the credit bureaus. You may even want to get another copy of your credit report after a month or two to make sure it is reported correctly. To receive a consolidated credit report, be sure to visit GetOutofDebt.org.