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Debts in Divorce

We've all grown up watching television shows about people fighting in divorce over all the fantastic wealth that accumulated during their marriage. I don't see it in my practice.

First, most people who get divorced don't fight about it all that much. They just quietly work out the painful details, end their marriage, and move on with their lives.

Second, most of the divorcing couples I see are likely to have as much debt as they have property. Getting disentangled in divorce is as much about assigning responsibility for the payment of debts as it is dividing up property. 

Finding out what you owe

Freezing debt

Allocating responsibility

Living with your debt

Finding Out What You Owe

You may already know what you owe. Most of us do. If your spouse has been secretive about financial affairs, however, or if your spouse is unable to resist spending money and taking on debts, you may be totally unaware of how much debt is involved.

The easiest way to find out what kind of debts you and your spouse owe is to get a credit report. Credit reports are a little like the weather. Everybody talks about them, but only three companies really do anything to produce them:

  • Equifax. Equifax Credit Information Services, Wildwood Plaza, Suite 500, Marietta, GA 30067. 800-685-1111.
  • Experian (formerly TRW). Consumer Assistance Center, P.O. Box 749029, Dallas, TX 75374. 800-392-1122.
  • Trans Union. 760 Sproul Road, Springfield, PA 19064. 800 916-8800.

You and your spouse may have a shared credit history that you don't know all about. Getting your credit report from all three agencies is probably a good idea, and it's not terribly expensive. Figure $30 for all three reports. The link above takes you to a company that provides your report from all three agencies. They send it out the day after you order it, and they offer some support services as well. Fair disclosure: they pay me 10% of the fee they charge you.

One other thing: I've checked with them about one aspect of their service. Even though the information on their site says they can only send the report to your home address. They've agreed to make special arrangements if you need it sent elsewhere. Just sign up for it and give the new address. Then you'll need to call on their phone number and identify yourself. Once they're satisfied that you really are you, they'll send it wherever you ask.

Sue thought she was just wasting time ordering her credit report. But she's still thanking me for insisting that she order it anyway. What she learned was a shock to me as well as to her. Her husband who had convinced her of his honesty and integrity had signed her name to six different applications, running up more than $8,500 in credit card bills in her name. I'm not saying your spouse is out to take advantage of you, but $30 seems like a small price to make sure.

And there's good news for U.S. Consumers in the form of an absolutely free credit report - with no requirement that you sign up for anything to get it. It's jointly sponsored and provided by all three credit reporting agencies, not because they're such nice guys but because the federal government requires it. Go to AnnualCreditReport.com and check there to see if reports are available yet for your state. If they are, it's a no-brainer.

If your report has errors, my guess is that you already know how to address those errors and get them corrected. Each company provides in the report itself detailed and specific instructions on how to correct errors.

If your credit is impaired, don't fall victim to one of those companies that promises to be able to repair your credit for you. The Federal Trade Commission has a good explanation of why you're wasting any money you spend on these companies.

Freezing Debt

Once you've identified your debt, of course, your main goal is to keep it from getting any worse. That is, you want to make sure that your spouse can't make the credit problems you already face worse by a barrage of new charges.

The easy and quick way to do this is the time-honored adversarial divorce technique of cutting off the credit cards. In reality, of course, you can't cut off what has already happened, but you can cut off the authority to make additional purchases. And you have to protect yourself. The way to do it is to call the number on the back of the card. You probably won't be able to cut off your spouse without cutting off yourself.

A word to the wise here: never never cut off your spouse without letting your spouse know what you are doing. Trust me. It will do you no good to have your spouse try to use the card in a store and be embarrassed by learning at the checkout that the credit card is now worthless.

If you and your spouse are cooperating with each other (and remember, most spouses do), see if you can't agree on a card or two that will remain in effect for designated purposes subject to designated limits on spending. You can check out some of the questions to discuss in the page on Working Arrangements for separation.

Allocating Responsibility

You have several choices as you deal with the payment of your debts. I've listed them in order of my preference: 

  • You can agree to pay them off now.
  • You can agree to be responsible for them and get more assets to compensate you.
  • You can agree for your spouse to be responsible for them and for your spouse to get more assets to compensate your spouse.
  • You can agree to be equally responsible for them.

If you have cash, or if you have property that you can sell for cash, paying off your debts now is simpler, cleaner, and safer for both of you. There is no uncertainty about the eventual cost of the debt, and you both know exactly what you have as you begin your new life. Most people can't do this, though. If you can't, you can't.

If you agree to be responsible for a debt, you still know exactly what you need to do to get the debt satisfied. You can decide now or later whether you want to liquidate property to produce cash to pay off the debt, and you can decide as you go how many adjustments you want to make in your lifestyle to allow for repayment.

If you agree for your spouse to be responsible for a debt the two of you share, be warned that you are vulnerable. You or your lawyer probably will insert some kind of indemnity agreement to the effect that your spouse agrees to hold you harmless for the repayment of the debt. The problem is that the indemnity is binding only as between you and your spouse, not on third parties. There's a separate page on one option you have here, called Reserving Alimony for Debts.

What does that mean? It means that when your spouse agrees to pay the joint Visa card debt and agrees to indemnify you for it, if your spouse later doesn't pay the debt, the credit card company could come looking for you and make you pay the debt. Sure, the indemnity gives you a claim against your exspouse, but who wants to have to sue an exspouse for a debt? You'd much rather have it taken care of at the beginning.

If you agree to share equal responsibility for payment of a debt, I think you get the worst of all possible worlds. You remain entangled and therefore vulnerable. You increase the extent to which you have to continue communicating with your spouse about money after the divorce. And in addition, you run the risk that one of you will take advantage of the other.

Here's how it works. Let's say you jointly owe $2,000 on a Visa card. That balance is accruing interest each month. Let's then say that one of you pays $100 toward satisfaction of the debt, and the other chooses to pay only $50. The balance accrues a little more interest than it would otherwise, but how much more? What happens if the next month you and your spouse reverse roles. The calculations become mind-numbingly (and unnecessarily) complex.

To paraphrase Nike, just don't do it. Instead of agreeing to share a given debt equally, divvy up the debts in some roughly equal fashion. Your goal is to finish with a list of debts for which you have sole responsibility, and a separate list of debts for which your spouse has sole responsibility.

Living With Your Debt

There are some smart things to do with your debt and some not-so-smart things to do. 

Let's start with the smart things

Negotiate a Lower Rate

It's much easier than most of us realize to get retailers, credit card companies, and finance companies to simply reduce the rate they're charging you. Just call the creditor and tell them you're taking your business elsewhere because you don't want to pay their sky high rate any more. That may be enough to get you a lower rate right away.

Live More Simply

Please know that your mother didn't pay me to say this. You really can do without some of those things that seemed so necessary a few months or years ago. Trade in your sexy car for a nice sensible one. Cancel the premium channels on your cable TV. Eat a salad at McDonald's instead of shrimp scampi at Etoine's.

It's not a decision you make; it's a thousand decisions you make every hour of every day. Interested? Check out Living More Simply.

Use Credit Counseling

Nearly every community of any size has a Consumer Credit Counseling Service. It's a not-for-profit agency that charges a fee based on your income. The counselor will help you identify the debts you owe and devise a strategy for getting out from under them. It's not magic; it's hard work. But it's simple, sound, and reasonable.

Here are two organizations that seem to have a national presence (as opposed to a local one) in credit counseling:

Know How Bankruptcy Works

You probably already know many of the advantages and disadvantages of bankruptcy. You can check out your options on the bankruptcy page, where you'll find lots of links to other sites dealing with it.

How About the Not-So-Smart Things?

Don't hook up with a "risk-based pricing" lender

This is all the rage now among lenders. They lure people in with promises of quick and easy loan approval, and they deliver what they promise. The problem is that the interest rates attached to these quick and easy loans may be sky-high, sometimes in excess of 20 percent a year. And watch out for "gotchas" in the form of ruinous penalties or increased interest rates if you're late with a payment. 

Don't sign up for a temporary "low-ball" rate

Let's be honest. Does it really matter what your lender charges you for the first six months, when you're going to be paying much longer? You need to think through the total cost to you over the life of the loan. If you don't know what this is, insist that your lender explain it to you before you sign up. If a lender is advertising a very low or even zero rate as an introductory rate, I have to assume they're trying to suck you in so they can gouge you.

Don't jump into a home equity loan

Home equity loans make a great deal of sense for many purposes. Because they're secured, you can usually get a lower interest rate on them, and the interest is often tax deductible. The problem with home equity loans flows from their advantage: they're secured.

If you fall behind on an unsecured credit card, your lender has to sue you to get the money, and you can reduce or eliminate the debt in bankruptcy. If you fall behind on a home equity loan, your lender can grab your house. You don't want that to happen to you.

Indemnity

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