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Protecting Your Credit During Divorce
from: John VenturaQ: 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.
About the Author
John Ventura, attorney, and Mary Reed are co-authors of Divorce For Dummies (2nd edition, Wiley), as well as numerous other books on personal finance and consumer law. You can listen to their Sept. 29th interview about divorce and financial issues at EverydayWealthRadio.com. To learn more, visit www.AboutDivorceForDummies.com
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