Divorce can be one of the most mentally and financially distressing events in a person’s life. Strategic debt management and credit counseling options can help alleviate the financial downside of divorce. If you are one of the millions of Americans who has just filed for divorce, you are likely facing emotional suffering. However, you might also be facing debt and credit problems, or you might be facing the prospect of losing your house because of the divorce.
Even the most amicable of divorces mean that a lot of changes must be made. The new order of things is not just about living alone or becoming a custodial or non-custodial parent. There’s also the matter of taking proactive steps toward establishing a reasonable plan for managing debt.
Here are some essential tasks that need to be addressed during and after the marriage is dissolved:
Debts and Divorce –
Avoiding financial problems during a divorce may be the biggest challenge anyone has to face. All debts, as well as all properties, must be accounted for and divided reasonably. This includes tax liabilities on property, insurance policies, and any investments jointly held. Property taxes and mortgages default to the one who keeps the property unless otherwise agreed to in the divorce papers. That should be taken into account when one negotiates for ownership. If there isn’t enough income to meet these obligations, another solution should be found or the owner could face losing the property at a future time.
Other debts work the same way. For instance, a vehicle comes with its payments and insurance included. Enough income must be available to meet those payments and should be a serious factor in deciding ownership. It works the same way as anything else: if it can’t be paid for, it can’t be owned. It may be hard to have to buy an older vehicle or live in an apartment, but realistic decisions must be made to avoid going deeper into debt and possible bankruptcy.
Credit card debt or unsecured debt can be a stickler because if both parties used the same credit card over a period of time, it becomes impossible to know how much outstanding debt belongs to which partner. To avoid that, each partner should have their own credit card regardless of income or other circumstances. This might not be the case at the time of divorce and that could take some time to negotiate a fair division of costs and ownership of the cards. The debt can be divided according to who has the higher income or who will have more expenses after the divorce. It’s difficult to be fair-minded about credit card debt, but it will be to the benefit of each partner if they can see their money situation with a minimum amount of emotion and approach it logically.
When dealing with all of this, money can seem to vanish for both parties. One way to minimize that is to use pen and paper, a tight fist, and some cooperation. A list of everything owned and everything owed should be available whenever debts are negotiated, although a truly fair division is seldom reached. A stricter budget will no doubt be required and some lifestyle adjustments will surely be in order.
Two Incomes Down to One Income or Finding a New Source of Income –
Divorce is never easy and from a financial standpoint, it can be one of the toughest periods of a person’s life. If you and your soon to be ex-spouse were like most couples, you were living on two incomes, which has become increasingly necessary to run a financially solvent household in this day and age. Books such as “The Two-Income Trap” by Elizabeth Warren and Amelia Tyagi examine this reality in depth.
Because of your pending divorce, you will be going from two incomes to one income – but will still need money to pay off credit card and housing debts and to afford basic daily essentials. Your expenses might not change significantly. Worse, you might be paying alimony or child support to your former spouse, depending upon the outcome of your divorce proceedings. These financial risks are good reasons to embark upon a debt management plan proactively rather than reactively.
What Happens with the Shared Debt? –
If you and your spouse have shared debt – be it housing debt or student loan debt that became joint debt as a result of marriage – it’s often best to settle it before the divorce proceedings are finalized. Common debt management sense proves that hidden debts can be disastrous in marriage – and paying down debts you never knew existed become more challenging still during divorce proceedings.
Your best bet is to have an honest discussion with your spouse about what debts you each owe, and how you will split or pay down the debt before and after the divorce. If a civil discussion is not possible, consider enlisting help from a mediator or lawyer
Who Gets the House? –
Housing debt can be a particularly difficult issue to settle, especially if you and your soon-to-be-former spouse still owe many mortgage payments. One option might be to refinance your joint housing so that only one party is responsible for mortgage debt payments. Another option might be to sell the home and split any money resulting from the sale between you and your spouse. A third option might be to decide who will live in the house and be responsible for mortgage payments.
Mediation can help settle this – and the spouse who takes over the house and the housing payments might find that renting out rooms can help to generate additional income. The most important issue in housing debt management is this: The debt doesn’t go away. Many financial experts advise that if the “who-is-paying-for-what” factor is not settled prior to your divorce being finalized, one party can be held financially liable for the other party’s failure to make payments.
Figure Out Who Owes What –
You and your spouse should each get a free credit report prior to the divorce. One or both parties could have credit errors on the reports, and correcting these errors is key to an amicable financial split. You do not want to wind up paying off your spouse’s credit card debt or student loan debt if you don’t have to. A clean and accurate credit report can save each party from hassle and headache later on.
Tips for Managing Debt after a Divorce:
- Getting Names Off Accounts ASAP – While the court may have approved the plan for assigning certain debts to each party, that doesn’t mean the former spouse no longer has to worry about the obligations taken on by the other party. Use the decision by the court to sever any connection with the accounts that the former spouse is now responsible for paying. While creditors have different procedures for removing names from accounts, all are obligated to honor the requests in a timely manner.
- Obtain Credit Reports Again – Could the former spouse have some hidden accounts that were never discussed? If those accounts have open balances, both parties could still be liable for them. The best way to learn if there are loans or other debts not disclosed as part of the divorce action, obtaining a credit report from all three of the major agencies will bring them to light. With legal help, it’s possible to notify those creditors and confirm that those balances are the responsibility of the former spouse and no one else.
- Take a Credit Counseling Course – Help with debt management is essential at this point. There’s the need to draft a new budget that focuses on one income rather than two. Even if there appears to be enough money coming in to handle everything, talking with a credit counselor and setting up a fresh budget makes sense. In the best case scenario, it will be possible to consolidate some of the debt and free up more net income. That paves the way for saving money and building a sound financial cushion.
- Seeking Debt Relief – For some, the end of the marriage will mean facing a mountain of debt and not being sure how to deal with it. One possible solution is to look into debt relief. The relief can take on several different forms, and one of them may be the ideal solution.
- Talk to Your Creditors – In general, this type of relief involves using different strategies to lower or even forgive outstanding debt. For example, a credit card issuer may be willing to settle for a lesser amount than what is owed, provided the agreed upon figure is paid in full by a certain date. In the meantime, the balance no longer accumulates interest.Some creditors also have hardship plans that allow clients to restructure debt if certain events take place. The end of a marriage is often included in those relevant events. The only way to know for sure is to contact each creditor and find out if and how they are willing to reduce or possibly eliminate the outstanding balance.
Many credit counseling services provide support to individuals who are returning to the single life and need help to get their finances in order. Gather those financial documents and arrange to meet with a professional as quickly as possible. Effectively managing those balances may be easier than the debtor thought possible
Consider pairing free credit counseling with a debt management program. Advantage CCS certified credit counselors can assist individuals with debt management strategies. You can schedule a face-to-face counseling session, a telephone session, or take the online credit counseling session from the comfort of your own home. After the counseling session, you will be able to examine your debt-to-income ratio and begin to adjust your lifestyle to account for your new income level (and any debts owed, post-divorce). It is possible — and sometimes simpler than you think – to adjust to a single income during a divorce. A smart debt management plan will help you to endure divorce without amassing additional debts.
Before you panic, consider enrolling in a debt management program and some credit counseling sessions through Advantage CCS to start the damage control as early as possible. Our credit counseling sessions are completely free and you’ll get a clear picture of what your current financial situation looks like before you start thinking about the “What Ifs” and panic sets in.