Taking Care of Finances During Divorce
Divorce on the horizon?
Divorce is an emotionally charged time. Because you’re juggling so many arrangements, you might be inclined to wait and work out financial details when your divorce is final.
However, many divorce attorneys suggest looking at financial responsibilities as early as possible—particularly if you have shared debt.
Look at shared debt
Most states allow the parties to settle debt issues between themselves. If you can’t come to an agreement and the court has to decide for you, shared debts can add to the complexity and expense of getting divorced.
Being proactive about your shared debt may help both parties avoid unnecessary damage to their credit ratings. More importantly, it may prevent future uncomfortable conversations about unresolved debts with your ex-spouse, or reduce the need for additional litigation.
Pay attention to your credit score and any joint credit cards. You may consider paying off or closing joint credit accounts before you divorce. One spouse may have a need to establish his or her own separate credit. Should you agree to stop using joint cards, or agree to allow limited usage, it’s important to keep tabs and make sure that the spouses are complying with that agreement.
Get help early
Consider paying off or closing credit accounts before you divorce.
Meet with your financial advisor at the first hint of impending separation. A good financial advisor will be compassionate and willing to remain neutral. He or she should also be fully supportive if you or your spouse decides to seek the guidance of separate advisors.
Your advisor can revisit your investment portfolio and do a cash-flow analysis to illustrate what you might draw as future income. Your advisor may also be able to offer advice about which shared debts you can afford to take on (or in some cases, those that might be best for you to avoid). With your consent, he or she can provide useful information to other professionals, such as attorneys or mediators who can assist in these determinations and negotiations.
Where to start?
One way to begin reviewing your debts is to request a copy of your credit report so you can verify which liabilities are in your name. If your spouse is willing to share his or her credit report, that can help you assemble a list of shared debts that need to be addressed, or long forgotten accounts that need to be formally closed. Your obligations might include a primary or vacation home mortgage, vehicle loans, credit cards and lines of credit, family business-related debt, and student loan debt.
Once you have identified your debts and assets, you should confirm the information on your credit report and update it, as necessary, with information from current account statements and agreements. This will allow you to get a more accurate and contemporaneous list of outstanding balances and more familiarity with key terms, such as interest rates applicable to those debts.
Once you have full picture concerning your debts and assets, you can discuss dividing them.
Debts tied to specific assets?
In some cases, joint debt may be attached to a specific asset, such as a mortgage on a home, or financing or lease agreements on an automobile. Generally speaking, the spouse who keeps the asset and has the benefit of its usage should also take responsibility for its loan, refinancing it in his or her name if possible.
It’s important to understand that your obligation to your financial institution is completely separate from any obligations to your ex-spouse resulting from your divorce decree. Your agreement with your spouse is not binding on financial institutions who extended credit.
For example, if Spouse A gets the house and agrees to pay the mortgage but doesn’t make the payments and Spouse B remains jointly obligated on the mortgage, Spouse B is still responsible for the debt. Spouse B’s credit rating and ability to get future loans can be compromised, and the bank could sue Spouse B for collections until the entire debt is paid in full.
Difficult knots to untie
Sometimes there are contentious debts, such as secret credit card debt created by your spouse. In most states, ownership of debts is decided by “equitable distribution.” A judge or mediator may assign debts to spouses according to factors such as who signed for it, got greatest value from it, or has the larger income.
Unresolved tax obligations are another situation that can be difficult to unwind and which may require you to continue working together on a shared debt. It is advisable to enlist the help of a tax professional, such as an attorney or CPA to assist you with these debts. They can assist you in discussions with the IRS about setting up separate payments on that joint debt and advise you about the availability of potential defenses, such as innocent spouse relief.
Information is important
Overall, information is the key to handling debt well during a divorce. Collect tax returns, credit reports, and bank and brokerage statements as early as possible. The more you know about your marital finances, the easier it will be for you to negotiate outstanding debts at the settlement table.
- If divorce is inevitable, start looking at your finances to help protect your financial future.
- Engage a trusted team of your own—financial advisor, attorney, and tax advisor.
- Get a copy of your credit report and keep an eye on your credit score.
- Stop using joint credit cards.
Wells Fargo Advisors is not a tax or legal advisor.