Debt and Divorce: A Quick Guide

Divorce can be a long and painful process – but add debt issues to an already emotionally heated experience and the fire can quickly rage. To cool the situation down and do the right thing for you both, it is vital to know the facts about debt and divorce.

Obtain your credit report
As soon as you know that divorce is in your future, obtain copies of your credit reports from all three major credit bureaus. Credit reports are not merged for married couples, but are separate documents for each individual. The reports will list all of your and at least some of your spouse’s credit-related activity up until the point you access it. Many people discover accounts or debts they were not previously aware of. The sooner you know what you are dealing with, the better.

Close jointly held accounts
If you have credit accounts that are held jointly, now is the time to close them. If the other partner uses the accounts before the divorce or legal separation, you may be held responsible for repayment. When canceling credit cards, make sure they read “closed by consumer” so it reflects more positively on your credit report.

For checking, savings, and investment accounts, change the title from joint to individual, and reassign the beneficiaries (the person who you want to inherit the account’s funds) to reflect your current wishes.

Open accounts in your name
If you don’t already have accounts (such as checking, saving, credit, and brokerage accounts) in your name only, open them now. This way you will be able to establish your financial independence, something you will need in the next stage of your life.

Know your state’s community and separate property laws
Each state has different laws about debt and divorce. If you live in a community property state, any debt you or your spouse incurred during the marriage, regardless of who racked it up, is a marital debt – meaning the creditor can hold both of you liable for repayment. In a separate property state, this may not be the case. Contact your State Bar Association to learn more about legal responsibility and debt for your area.

There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In Alaska, couples have the option to adopt community property rules when they marry.

Debt after the divorce
Keep in mind that a divorce decree – where each of you agrees to pay specific debts – is for convenience and peace only. If the debt is jointly held, creditors can come after either of you to collect what is owed. That is why it is important for both of you to treat the post-divorce debts responsibly. Missed payments will affect each of your credit reports and collection action may start for either of you.

Divorce and bankruptcy
If you suspect that your spouse will file for bankruptcy after the divorce, be sure to discuss it with your lawyer before you go to court. The separation agreement may be structured to take bankruptcy into consideration. If your former spouse does discharge joint debts in bankruptcy, you may be held responsible for the entire payment, though sometimes bankruptcy court will discharge or release the spouse from paying those debts.

Divorce is often an incredibly stressful event, and the last thing you may feel like doing is spending time and energy on your money issues. It is important to be practical and thorough, so if you need to, get professional assistance during this time. Your financial institution may offer guidance with your accounts, your attorney (if you have one) can advise you on your legal rights and responsibilities, and many financial planners specialize in the unique circumstance of divorcing couples.

Revised January 2016.

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