Going through debt and going through divorce are both difficult situations. Going through both at the same time can feel nearly impossible. There are so many questions that plague your mind: Who is responsible for credit card debt in a divorce? Who maintains control of which assets? How does the IRS see your tax debt now? Answer these questions and more with this guide.
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Separating the Myths from the Facts: What really happens to debt in a divorce?
When you tell friends and family about your divorce, you will likely hear a lot of divorce myths disguised as good-natured advice. In a stressed emotional state, you may be more likely to believe them. Don’t be fooled – especially when it comes to financial myths.
Divorce Debt Myth #1: You aren’t liable for any of your ex-spouse’s debt after you divorce.
Reality: You could be liable depending on the situation, the state you file for divorce in, and terms of the debt.
Divorce Debt Myth #2: Joint accounts are automatically closed after divorce.
Reality: It’s illegal for creditors to close an account due to altered marital status. Joint accounts can be closed by only one of the individual account holders, but they must have a zero balance before the account can be closed.
Divorce Debt Myth #3: If a divorce agreement names one spouse responsible for joint account payments, the other spouse can’t be held responsible.
Reality: Unless the names on the account change to remove one of the account holders, both spouses are still responsible for payments.
Divorce Debt Myth #4: Nothing your ex-spouse does will show up on your credit report.
Reality: When you share accounts, your ex-spouse’s actions can still affect your credit report. If you have joint accounts, close them quickly to avoid any potential damage moving forward.
Divorce Debt Myth #5: Spouses share a credit score while they’re married.
Reality: Every individual has their own credit score, regardless of marital status. While joint accounts can affect both spouse’s credit, you maintained individual credit scores throughout your marriage and need to maintain those scores moving forward.
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How Divorce Affects Different Types of Debt
Not everything gets split down the middle. Divorce affects different types of debt in varying ways, and every effect is totally dependent on the situation and the judgment by the court. Here are some examples:
Assuming control of debt with collateral
Debt with collateral, such as a mortgage or car loan, can be difficult to divide. If you want to keep the collateral – the house, car, or other assets – you need to assume control of it in the divorce agreement. Keep in mind that you may have a hard time affording these payments on your own.
Credit card debt in divorce
How is credit card debt split in a divorce? This is a common question for couples when they split up, especially because credit card debt is so common. Usually, the debt will be divided depending on whose name was on the account. This can get messy if you have joint accounts.
The bottom line is this: creditors don’t care about your divorce decree. You need to figure out how the debt will be divided during divorce proceedings and stick to the agreement after the fact. Once your divorce decree is final, pay off joint accounts quickly and close them, so your ex can’t make new charges that you’ll be responsible for repaying.
Student loan debt and divorce
With the country’s crushing student loan debt, it’s no wonder that student loan debt could cause problems in divorce. Student loan debt that you incurred before your marriage still belongs to you after your divorce. The same would be true of your ex.
If you took out student loans during your marriage, however, things get more complicated. It’s possible you will have to work with divorce counsel to divide the debt, or if it’s only in one person’s name, you can just divide it that way. The way student loans are split up in a divorce is largely dependent on your unique situation.
Dividing tax debt in divorce
Whether or not you are liable for their back taxes at all depends on when the taxes were filed and if you filed jointly. Tax debt in a divorce is often divided according to the person that incurred it. However, if you live in a community property state, the tax debt may be divided equally between you and your ex-spouse, regardless of who incurred it or current employment status.
Community property states currently include:
- New Mexico
Innocent spouse relief
If your spouse has a large amount of tax debt that you weren’t aware of, you may qualify for Innocent Spouse Relief from the IRS.
Debt and Divorce: Step-by-Step Financial Prep
When you decide to get a divorce, you may feel the need to pay off your debt as quickly as you can. This is not always a good idea, and you could end up in even more financial trouble. Instead of rushing to eliminate debt, focus on getting your divorce agreement to reflect what you really want and need. Once that’s organized, you can focus on debt relief.
These basic steps can help you better prepare for your financial life post-divorce:
1 – Separate joint accounts.
If you and your spouse have joint accounts, it’s time to close them or find a way to take your name (or theirs) off.
2 – Open accounts under your own name.
After you get rid of your joint accounts, you will need some accounts of your own. Replace closed accounts with accounts under your own name. If you are changing your last name post-divorce, make sure you do that before you put your married name on the new account.
3 – Establish a personal budget.
The budget you had as a couple won’t be the same as your individual budget. Reassess your finances post-divorce and set a new budget for yourself. This can help you get out of debt faster – and stay out of debt in the future.
Because of your divorce, you may find that you have to add new things to your budget. Child support, alimony, and higher payments on debts with collateral are all possibilities you should consider.
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Article last modified on October 1, 2019. Published by Debt.com, LLC