More and more divorcing couples have unsecured debt issues: i.e., debt that is not secured against an asset. Although debt can be a significant issue for married couples, it becomes a much bigger problem to deal with in separation and divorce.
Debts that You Do Not Know About
You may already know what you owe. However, if your spouse has been secretive about your financial affairs, you may be totally unaware of how much debt is involved. Your first step should be trying to determine what you’re dealing with. You should always consult a lawyer with respect to debt that you were totally unaware of to determine if you will be responsible for a share of it.
Debts that are secured against an asset – e.g., a mortgage, car loan, etc. – should usually be retained by the spouse retaining the associated asset. Unsecured debt is often more difficult to deal with.
Three Options to Deal with Debts
There are really three options when it comes to dealing with the debts of a marriage with respect to the decisions about dividing the matrimonial property.
- You can agree to pay off debts now.
- If you and your spouse have cash or if you have property that you can sell for cash, paying off your debts now is simpler, cleaner and safer for both of you. If you can work together to solve the credit issues, sometimes that is the best way. There will be no uncertainty about the eventual cost of the debt, and you both know exactly what you have as you begin your new independent life.
- You can agree that either you or your spouse will be responsible for the debts and get other assets to compensate you.
- If you agree to be responsible for a debt, you still need to know exactly what you need to do to get the debt satisfied. You can decide now or later whether you want to liquidate property to produce cash to pay off the debt, and you can decide as you go how many adjustments you want to make in your own lifestyle to allow for repayment.
- If you agree that your spouse will be responsible for a debt that the two of you share, be warned that you are vulnerable. You or your lawyer may insert some type of indemnity agreement to the effect that your spouse agrees to hold you harmless for the repayment of the debt. The problem is that the indemnity agreement is binding only between you and your spouse, not on third parties. This means that when your spouse agrees to pay off the joint VISA card debt and agrees to indemnify you for it, if your spouse later doesn’t pay off the debt, the credit card company could come looking for you and make you pay the debt. Sure, the indemnity gives you a claim against your ex-spouse, but who wants to have to sue an ex-spouse for a debt? It would be best to take care of it much earlier in the process.
- You can agree to be equally responsible for the debts.
- If you agree to share equal responsibility for payment of a debt, this is potentially the worst option. You remain entangled and therefore vulnerable. You increase the extent to which you have to continue communicating with your ex-spouse about money after the divorce. And in addition, you still run the risk that one of you may take advantage of the other.
To paraphrase Nike, “just don’t do it!” Instead of agreeing to share a given debt equally, divvy up the debts in some roughly equal fashion according to the matrimonial property laws. Your goal is to finish with a list of debts for which you have sole responsibility, and a separate list of debts for which your spouse has sole responsibility.
It can be very complicated. More importantly, separation and divorce will provide you with a new beginning. Whether you and your spouse accumulated debt together, whether your spouse accumulated debt behind your back or whether it was your own spending habits or lack of funds that created the debt issue, now is the time to work it all out. It may also be time to learn new habits including the art of budgeting, the ability to say I don’t need that, etc. Do not berate yourself for your lack of involvement, at this most stressful time in your life. Your mental health is likely not equipped to take a self-beating. Every mistake is an opportunity to learn, seize this opportunity and put your financial future on the right track!
Sharon Numerow is a Certified Divorce Financial Analyst® at Alberta Divorce Finances in Calgary,
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