An area of conflict that often occurs when a married couple divorces is how to deal with and divide the debt. This can be emotionally difficult, since one of the pressures on the marriage may have been financial issues. There are three important steps that should be taken to equitably divide the debt.
Step One: Get a Credit Report
The parties often do not realize all the debt that exists or the type of debt that exists. Some spouses think if their name is not on the credit card or the loan, then the debt is not theirs. For example, they may say, “Oh, that is not my debt. It is in her name for the designer bags she bought.”
That is not true. If the debt was incurred during the marriage, it is marital debt. The best way to learn how much debt exists is for each spouse to obtain a credit report in their own individual name. Then, go over it carefully and identify not just the fact that the debt exists, but why was it incurred.
Step Two: Identify the Type of Debt and Why it Exists
When the debt is identified, the couple then needs to determine if there is an asset that goes with it. For example:
- If a line of credit was taken out to pay off vehicles, make repairs at the lake house or something else, the next question to answer is, who will be driving the vehicle? Who is going to take the lake house?
- Hidden Debt: Are there unknown credit cards in one party’s name? What was the purpose of those credit cards and how were they used? Were they used to pay for an activity for the kids, but the spouse who took out the cards did not want the other spouse to know they could not afford the activity? Were they necessary to cope with the expenses of daily living?
- Gambling debt may be an issue. The person responsible for the gambling debt may or may not accept responsibility for it. A marital asset may need to be used to pay the gambling debt or the unknown credit cards.
Step Three: Division of the Debt
There may be ways to reduce the overall debt. For each debt, there may be an asset that goes with that debt. If the couple owes more than the asset is worth, selling the asset will reduce the debt and the remaining debt can then be divided. How the remaining debt is apportioned between the parties is one of the advantages of the Collaborative Divorce process, because it allows for some creative options and solutions to the division of the debt.
The income of each party must be analyzed to see how the debts can realistically be apportioned. It is important to remember that debt does not just go away. It must be paid – whether by selling assets or one of the parties assuming and agreeing to pay the debt. However, the other party needs to be aware that if the debt doesn’t get paid, they can still be responsible for it.
Collaborative Divorce: Settle Debt Issues with a Financial Neutral
In the Collaborative Divorce process, there is a neutral financial consultant who sits down with the couple to assess the debt. In addition to financial expertise, the financial neutral charges lower rates than the attorneys. The neutral can help answer the important questions about the debt and develop the financial models that include options for dividing the debt in an effort to be fair and equitable, and to allow both sides to emerge from the divorce with a clear financial plan.
For assistance in resolving how debt should be apportioned during your divorce, or for answers to any of your divorce questions contact Bruckner Hernandez Legal Services to schedule a consultation.