The best possible way to view a divorce is to see it as a new opportunity to move on and start fresh. But that can be hard to do when you’re entangled in your ex-spouse’s debts. Exactly what are you paying for? If your ex-wife charged a spa treatment to a credit card, should you pay for it? Are you responsible for paying the bills on your ex-husband’s golf clubs?
You can take steps at any time to protect yourself or minimize damage from debt and credit problems. Whether you are planning on a divorce, going through one currently, or living with enduring debts from a past divorce, you can use the following guidelines to relieve yourself of unnecessary stress.
Step 1: Dissolve joint accounts.
If you’re planning on a divorce, put all of your cards on the table, literally. Take out all of your credit cards and determine the ones in your name, in your ex’s name, and whether either of you is an authorized user or a user of a joint account. Unlike users of a joint account, authorized users are not legally responsible for payment. You may be surprised by how many credit cards you signed up for but didn’t really use. Make sure you know what you have co-signed – even though your ex may have opened the account, you may still be held responsible for payments if your ex-spouse cannot make them.
Make sure that you and/or your lawyer dissolve all joint accounts, including credit cards. Should a spouse be unable to make payment, the liability would usually fall on the other spouse to pay off the debt. Financial rearrangements, of course, must be prepared, especially if you are not the breadwinner of the marriage. Financial hardships increase when monthly expenses are no longer shared.
Step 2: Plan a new budget.
You may have planned to pay off credit card debts to some extent with your spouse’s income, but without that crutch, you could face calls from collection agencies. If you cannot receive further financial support from your spouse to assist with your debts, and if no other income is available, you may want to consider a debt resolution plan with a professional before turning to bankruptcy.
Step 3: Request financial relief from creditors.
This step is only necessary if you are expecting significant financial hardship after the divorce. Contact your creditors and inform them of the situation. Creditors generally allow for a revised payment plan that will let you pay interest only for 3 to 6 months, based on the nature of the hardship. However, if there is no financial hardship involved, creditors are not likely to alleviate your credit card obligations. In addition, as you would only be paying interest, the principal balance would remain unchanged.
Step 4: Resolve unsecured debt accounts.
You may be held accountable for your future ex’s credit card debt. Unfortunately, if you cosigned an account, you agreed to a legal obligation, even if you did not make any charges to the account. During divorce court proceedings, it is up to the judge to divide the obligation for credit card charges. However, creditors may sometimes refuse a request to dissolve a credit card account because they prefer to have “double liability” to increase the chances of having everything paid. Therefore, although it may not seem fair, the task of payment may still rest on your shoulders.
In this situation, your first step is to find out during your divorce negotiations and discussions if your soon-to-be ex-spouse can pay off the debt. If this is not possible and you end up getting stuck with the debt, you may have several possible resolutions at hand. The best way to handle the situation is to pay off the entire debt as soon as possible. It is recommended that you pay more than the monthly minimum, which is the costliest and longest way of getting out of debt.
Bankruptcy is a commonly known practice, but personal finance experts call it a last resort. This is due to the fact that bankruptcy is the worst possible blemish a person can have on his or her credit rating. Often, a person cannot apply for a major loan, such as a mortgage, if a bankruptcy has occurred within the past seven years. Furthermore, filing for bankruptcy may sometimes be too expensive to be worth the effort, and it does not lift all debts, such as recent tax liabilities and government-funded student loans.
If you’re looking for a solution for unsecured debt, such as credit cards or medical bills, there are different types of services you can seek for assistance. Debt consolidation loans are one possible route. This method secures your unsecured debt with physical collateral such as a home. Disadvantages to this method are that it requires you to have good credit to qualify, and by converting unsecured debt into secured debt, it puts your house, vehicle, or other collateral at risk for collection by creditors.
Another possibility is consumer credit counseling. These agencies aim to help consumers pay off their entire debt to creditors, but with interest and usually over six years or more. It still beats paying monthly minimums, and it isn’t as damaging as bankruptcy. However, the payment plan can be expensive and, with some agencies, missing one payment can get you dropped from their program.
Yet another option is a debt settlement program. Although settlements lower credit ratings, they tend to be less costly and drawn out than consumer credit counseling. Enrolling in such a program allows the consumer to resolve the debt by paying only a portion of it.
Step 5: Obtain a credit report.
Finally, a divorced consumer should follow up by requesting a credit report a reasonable amount of time after the joint accounts are dissolved. This should be done regardless of whether debt problems are anticipated. Check for any errors on your report, or you may find an unpleasant surprise when you apply for your next loan.
Make a clean break from your ex-spouse’s credit card purchases by taking these steps. By protecting or extricating yourself from unnecessary debt, you will be one step closer to being financially independent.
