Couples often think that if they've figured out who pays what and get court approval, they're safe. Not necessarily. And it's even more important to be careful during this economic downturn.
Kathy M. Kristof, Personal Finance April 19, 2009
Couples in the process of divorce spend a lot of time divvying up their assets. But in today's miserable economy, experts maintain that soon-to-be-exes should take even greater care dividing up the debts.
Otherwise, your former spouse's job loss could end up hitting your balance sheet -- and credit report -- years after you think the divorce is settled.
"This is one of the more difficult things to do and people often forget about it," said John Ulzheimer, director of consumer education at Credit.com. "But if you don't do it, or don't do it right, it can not only cost you money, it can cost you your credit rating for a long period of time."
Unfortunately, even people who think they are dividing debt often aren't dividing it legally -- despite approval from a divorce court, experts say.
Couples often think that they can assign repayment of debts in the process of a divorce -- e.g., you repay the Visa; I'll take the AmEx -- said D. Michael Bush, a Newport Beach-based lawyer. But unless they got the creditor's approval -- in addition to the court's -- the assignment is not legally enforceable, he said.
"There has to be an upfront agreement that includes the lender, or the lender can go where the money is -- it doesn't matter what you did in court," he said.
So how do you properly divide debt?
First, order credit reports.
Everybody has the right to one free credit report every year from each of the three major credit bureaus. Now is the time to request one at www.annualcreditreport.com. On the report, you'll see that each credit listing shows the status of your account, when opened, when closed (if applicable) and whether the responsibility is individual or joint. These reports also show your payment history with each debt, the addresses your creditors have on record, and the names under which you have received credit.
Under normal circumstances, it's wise to check your report once annually for errors and signs of identity theft, such as new addresses and new credit that you didn't secure. In a divorce, you need the credit report because you're likely to find old accounts you'd forgotten about that have never been properly canceled, said Bill Hardekopf, chief executive of LowCards.com.
Next, cancel joint credit cards.
If both you and your ex are authorized users on credit card accounts, those cards should be canceled. If the cards have revolving balances, you must pay off the balances with other assets or transfer the debt to cards that are newly issued in just one name.
Why is that so important? A jointly held card is reported on the credit reports of both you and your ex-spouse. If your ex fails to pay bills on time, the damage ruins your credit too.
Worse, said Hardekopf, is that you are jointly and separately liable for any balance on that card. The divorce court does not have jurisdiction over existing contracts with your credit card companies. So even if the court says your ex is supposed to pay that bill, the creditor can come after you to collect. If an account is left open, your ex can add more debt and leave you holding the bag.
Not fair? True. But if you don't cancel the cards upfront, you'll be left to argue about it, possibly in court (again) later.
It's also important to check student loans.
Many student loans are issued in just one name and payable by just one person. But if you incurred private student debts while married -- or if you cosigned on your spouse's loan -- they may be joint obligations. Traditional student debt is low-cost and flexible and generally the last debt you want to pay off. However, you might want to pay off or refinance any private student debt to clarify repayment obligations after the divorce.
Auto and home loans also become an issue in divorce.
You don't necessarily want to refinance a home loan if you have a good rate, and you might not be able to refinance a used automobile. If you have these debts, you may want to try to modify them with your lender.
Typically, this requires the lender to look at your new, single financial statements and determine whether you can afford the payments on whatever income you'll maintain, whether that's from work or spousal support.
Another thing that can have enormous effect in a divorce is if one spouse files for bankruptcy protection.
Gary Leibowitz, a Los Alamitos bankruptcy attorney, says he's increasingly getting referrals from divorce lawyers who realize that their clients have more debts than assets. In these cases, it's often necessary to file for bankruptcy in conjunction with the divorce, he said.
And if one spouse is in bankruptcy, Leibowitz maintains that it would be foolish not to have the other look closely at filing too. The reason: all those joint debts.
"Any debt that was incurred during the marriage is joint debt," he said. "You could have divided up $100,000 in debt and then one spouse files bankruptcy and gets their $50,000 discharged.
"That leaves the other spouse with the whole obligation because that debt was never really divided. The [divorce] court doesn't have the jurisdiction."