Protecting Your Credit During Divorce
Q: My spouse and I are divorcing, and share a number of joint
credit accounts. In deciding how to deal with these accounts,
we've discussed his paying at least some of them off as part of
our settlement agreement since he earns more than I do. Recently
however he mentioned that if he took over the debts he would not
pay them and would file for bankruptcy instead. What should I
do?
A: We always advise divorcing couples with joint debts to sell
some of their joint assets if possible and use the proceeds to
pay off the debts and then close the accounts. This option
eliminates the possibility of future problems after their
divorce related to the accounts.
Another option if you don't have any joint assets to sell to pay
off is for you or your spouse to transfer all of the debts to a
credit card that one of you has in your own name. Whichever
spouse does this should be compensated by receiving assets
equivalent to the value of the joint debt. For example, if you
sell your home for $300,000 and net $100,000 from the sale, you
would each get $50,000 if you were sharing the proceeds equally.
However, if one of you assumes all of your joint credit card
debt, then that person would get more of the proceeds from the
sale of the house. If you and your spouse agree to pursue this
option, be sure that once the joint accounts are paid off, that
they are closed. Whichever spouse closes the accounts should
provide the other with proof of this fact.
Only as a last resort should you agree to let your spouse pay
off your shared debts since this option is fraught with
potential landmines. For example, if your spouse does not pay
them according to your agreement or is late with the payments,
your credit history as well as your spouse's will be damaged and
the creditors may come after you for payment. The same is true
if your spouse files for bankruptcy after your divorce and
includes the joint debt in his bankruptcy. Another danger is
that while your ex is paying off the accounts, he could run up
the account balances and since the accounts would still be in
both of your names, you would be legally responsible for the
debts if he did not pay them.
Although there is no 100% sure way to protect yourself from all
of the potential problems associated with this particular
option, if you decide to pursue it, it is advisable to get a
lien against an asset/s your spouse may own in his name. The
value of the asset/s should be equivalent to the total amount of
joint debt he is agreeing to pay off. That way, if he does not
live up to the agreement, you can initiate a court process to
try to take the asset/s and then you can sell it or borrow
against it to pay the balances due on the accounts. When you are
working out the terms of this option, be sure that your
agreement requires that once he pays off the accounts, he must
close them and provide you with proof that he has done so. Also,
your agreement should compensate your spouse for assuming the
debts by giving him additional assets from your marriage that
are worth the same as the total amount of the debt he is paying
off.
If your spouse is irresponsible with money and you can afford
to, you should assume all of the joint debt yourself and pay it
off. Then you will know that the accounts are being paid on time
and you won't have to worry about whether or not he is running
up the balances on the accounts.
Bottom line, when you are getting divorced it is best to
eliminate all financial ties with one another. Also, if you
marry again, you can avoid the problems that come with shared
credit should that marriage end in divorce too by maintaining
credit accounts in your own name and minimizing all shared
accounts.
By the way, the new bankruptcy law goes into effect on October
17, 2005. As a result, if may make it more difficult for your
spouse to discharge his debts in bankruptcy. So, talk to your
attorney immediately if your ex tells you that he plans to file
so you can discuss any steps you may be able to take to minimize
the impact of the bankruptcy on you.
Q: My husband and I are getting divorced. One of the big
questions is who gets to keep the house. I want to stay there,
but he wants to sell it. What should I do?
A: Whether or not to keep the house is a big decision that many
divorcing couples face. As difficult as it may be, when you are
deciding what to do, it's critical that you put your emotions
aside and look at the issue purely in terms of dollars and
cents. Here are some of the issues you should consider: If you
keep the home, what will your spouse get in return? Do you own
another asset that is of equal value that he can have? Are you
in a financial position to borrow the money to pay him his share
of the value of your home? If you answer "no" to all of these
questions, then you probably need to sell your home so each of
you can get your money out of it.
Even if you answer "yes" to the questions, keeping your home may
not be a wise financial move for you because you may not be able
to make the monthly mortgage payments, insure the home and pay
the property taxes on it. Also, be sure to consider whether you
can afford to maintain your home. Eventually for example, it may
need a new roof, a new AC and heating system, foundation
repairs, etc., all of which are expensive yet essential to
maintaining a home's value. Given that studies show that most
women are in a worse financial situation after their divorce
than they were before, your answer to these questions is likely
to be "no" if you are really honest with yourself.