Divorce Debt

Question: My spouse and I are getting divorced and we have a lot of debt. Do you have any tips I should know about?

Answer: Yes, this is a very important topic. In your divorce, you’ll probably each take some of the debt (and whatever assets are available). The divorce decree will state who is taking responsibility for which debts.

The thing you have to know, however, is that the credit card companies don’t give a “hoot” about the divorce papers. If it’s a joint account, you are still responsible and if your spouse isn’t able/willing to pay it, they will come after you. This is true for state and federal income taxes, too.

A client recently came to me with this very situation. Her ex-husband had been paying on the debts just fine until he had a very bad motorcycle accident and ended up in bankruptcy. The creditors came after her for the balances.

The best thing you can do is to get all the joint debts paid off out of the proceeds of the assets if at all possible.

Credit and Divorce

Mary and Bill recently divorced. Their divorce decree stated that Bill would pay the balances on their three joint credit card accounts. Months later, after Bill neglected to pay off these accounts, all three creditors contacted Mary for payment. She referred them to the divorce decree, insisting that she was not responsible for the accounts. The creditors correctly stated that they were not parties to the decree and that Mary was still legally responsible for paying off the couple’s joint accounts. Mary later found out that the late payments appeared on her credit report.

If you’ve recently been through a divorce?or are contemplating one?you may want to look closely at issues involving credit. Understanding the different kinds of credit accounts opened during a marriage may help illuminate the potential benefits and pitfalls of each.

There are two types of credit accounts: individual and joint. You can permit authorized persons to use the account with either. When you apply for credit?whether a charge card or a mortgage loan?you’ll be asked to select one type: Individual or Joint Account

Individual Account: Your income, assets, and credit history are considered by the creditor. Whether you are married or single, you alone are responsible for paying off the debt. The account will appear on your credit report, and may appear on the credit report of any “authorized” user. However, if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), you and your spouse may be responsible for debts incurred during the marriage, and the individual debts of one spouse may appear on the credit report of the other.

Advantages/Disadvantages: If you’re not employed outside the home, work part-time, or have a low-paying job, it may be difficult to demonstrate a strong financial picture without your spouse’s income. But if you open an account in your name and are responsible, no one can negatively affect your credit record.

Joint Account: Your income, financial assets, and credit history?and your spouse’s?are considerations for a joint account. No matter who handles the household bills, you and your spouse are responsible for seeing that debts are paid. A creditor who reports the credit history of a joint account to credit bureaus must report it in both names (if the account was opened after June 1, 1977).

Advantages/Disadvantages: An application combining the financial resources of two people may present a stronger case to a creditor who is granting a loan or credit card. But because two people applied together for the credit, each is responsible for the debt. This is true even if a divorce decree assigns separate debt obligations to each spouse. Former spouses who run up bills and don’t pay them can hurt their ex-partner’s credit histories on jointly-held accounts.

Account “Users”

If you open an individual account, you may authorize another person to use it. If you name your spouse as the authorized user, a creditor who reports the credit history to a credit bureau must report it in your spouse’s name as well as in yours (if the account was opened after June 1, 1977).

Advantages/Disadvantages: User accounts often are opened for convenience. They benefit people who might not qualify for credit on their own, such as students or homemakers. While these people may use the account, you?not they?are contractually liable for paying the debt.

If You Divorce

If you’re considering divorce or separation, pay special attention to the status of your credit accounts. If you maintain joint accounts during this time, it’s important to make regular payments so your credit record won’t suffer. As long as there’s an outstanding balance on a joint account, you and your spouse are responsible for it.

If you divorce, you may want to close joint accounts or accounts in which your former spouse was an authorized user. Or ask the creditor to convert these accounts to individual accounts.

By law, a creditor cannot close a joint account because of a change in marital status, but can do so at the request of either spouse. A creditor, however, does not have to change joint accounts to individual accounts. The creditor can require you to reapply for credit on an individual basis and then, based on your new application, extend or deny you credit. In the case of a mortgage or home equity loan, a lender is likely to require refinancing to remove a spouse from the obligation.

For More Information

If you need additional help during this time of financial stress, please call Cindy Morus at 541-387-2995. She’s been through it, too.

Cindy S. Morus (http://www.dontdivorceyourmoney/) is a Certified Divorce Financial Analyst specializing in helping people get fair settlements in divorce. She is also a Certified Credit Report Reviewer, Certified Retirement Counselor, Certified Financial Recovery Counselor and Licensed Tax Preparer. Contact her at 541-387-2995.

Recently Divorced Finances

Question: What advice can you give recently divorced women on how to manage their finances now that they are facing life as a single mom on a limited income? What should be their first priority? Lisa A. Fredette ~ CTA Certified Life Coach ~ Passionate About Life Coaching ~ http://www.lisafredette.com

Answer: Hi Lisa, that’s a really great question and I’m sure most newly divorced single moms are wondering the same thing. I could write a book about that!

Seriously, there are several things you’ll need to do to manage your finances now – some “outer” and some “inner”.

Outer:

1. Live below your means. That means creating a spending plan that takes future expenses into consideration including car repairs, home repairs and medical expenses. I recommend www.INGDirect.com for keeping that money.
2. Take advantage of any government programs you are eligible for such as food stamps or free/reduced meals for your children. You may also be eligible for Earned Income Credit – check with your Tax Preparer (H&R Block doesn’t charge you to do estimates).
3. Review your employer’s benefit programs such as 401k (the match is free money and your contributions reduce your income taxes), health savings accounts (also reduce your taxes). Also check to see that you don’t have too much being taken out of your paycheck for taxes. It’s always nice to get a tax refund but it’s been your money all along and you lend it to the government interest free all year.

Inner:

1. Take time to play. Play with your kids, play with your friends and take time for yourself. Kids don’t need you to spend money on them, they would rather play make-believe or bake cookies with you. When my kids were little, we used to have “no silverware dinner” – ribs or chicken nuggets, oven fries, veggie sticks or artichokes (”Mom, who do you think invented artichokes,” they would ask). They’re teenagers now and they still get a kick out of seeing only plates and napkins on the table. Get together with other single moms for a potluck or picnic at the park or movie night – you don’t have to go out to have fun. Do a babysitting swap so you can have time for yourself – just to read, take a walk or a bubble bath.
2. Express Gratitude Daily. Even though times are tough, it will get better. Expressing gratitude can keep life bright for you. It’s a great tool to teach your children, too. Practice giving back – help them weed for an elderly neighbor or pick up a few groceries for someone who’s housebound. Work together at a food bank or a Habitat for Humanity project.
3. Talk to kids about money. Teach them how to figure out unit costs and sale prices. Teach them how to make choices. Teach them about saving for things they want in the near future and far away like college. When they ask for something, ask them “how can we make that happen?” rather than “we can’t afford that”. Offer to match money they’ve saved or help them make money. Give them an allowance appropriate to their age and transfer responsibility to them. For example, make the entertainment money you hand them out of pocket part of their allowance and the same for clothing. An allowance doesn’t have to mean that you are giving them any more money than you are already spending on them but that you let them decide how to spend it. They’ll stop “nickel and diming” you and you’ll be surprised at the choices them make when it’s their money rather than yours!

Cooperative Divorce – Four Ways to Avoid a Messy Divorce

As an experienced family law attorney, I have seen some very messy divorces and I have seen some “healthy” divorces. I define a healthy divorce in which the parties continue to have a relationship, albeit a different relationship, while they pursue their separate lives.

Child development specialists are unanimous that if there is a divorce, a healthy divorce is the best way to go for the sake of the children. We all know someone who has had a messy divorce and there are plenty of news stories regarding other people’s divorces.

Healthy divorces are rarely the focus of news reports. Yet they truly do exist and are worth pursuing instead of the alternative. How can you avoid a messy divorce?

1. Consider the consequences of a messy divorce

Have a conversation with your soon-to-be ex regarding your goal of avoiding a messy divorce and agree to a plan to avoid it. The major downsides to hotly contested divorce are:

• A major financial expenditure
• All information becomes public
• Very time consuming
• Emotional toll on both parties
• Emotional damage to the children
• Damage to career and business

2. Focus on the issues most important to you

My favorite analogy is that of dividing an orange. A couple fought over an orange and asked the assistance of a wise person. The wise person divided the orange in half. Easy answer – both sides should be happy, right? No, both sides were unhappy. One person really wanted the juice and one really wanted the peel for making potpourri. Therefore each had lost when it would have been possible for both to win.

Look at each important issue and determine what your greatest interest is. Can both of your needs be met in some way? Is there room for trade offs? If you are determined to fight every detail down to the pots and pans, you are not going to be able to have a healthy divorce.

Focus on those issues most important to you. For some, this is the parenting plan and how much time each spends with the children. Money can be a big issue but often there can be satisfactory alternatives that can meet each party’s needs with help from a Certified Divorce Financial Analyst. Get it down to the issues important to you and leave enough room for both parties to survive after the divorce. Often couples find that both of their needs can be met once they are able to determine what is most important.

3. Consider the best revenge

You are hurt and the other party is clearly wrong. Even if this is completely true it does not help solve the problem. If you go to court, Judges are not interested in who did what to whom.

One does not get more money or a better deal because the other person was “bad”. Divorce court is not the place to exact your revenge. Your revenge is living well. A healthy divorce gives you a head start toward that goal. You do not have to spend time in recovery from a messy divorce and, since the process is usually shorter, you get started on your new life even sooner.

4. Explore healthy divorce alternatives

There are many professional advocates to healthy divorce. Cooperative divorce, mediated divorce, and collaborative law are rapidly gaining proponents among lawyers, financial professionals, and mental health professionals. Search for these professionals in your area that specialize in the healthy divorce alternatives mentioned and use those terms in search engines to find information on the internet.

This is a guest post by Karin Quirk who is a family law attorney trained in divorce mediation and collaborative law and practices in Bellevue, WA. For more information go to http://www.karinquirk.com

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