Debt and Divorce: 4 Things to be Aware Of

Karen BigmanBlog, Finance

Until a divorce petition is filed with the courts, any assets that accrue value will be considered marital property. At the same time, any debt accrued by either party, will be marital debt. You are equally responsible for marital debt. Debt incurred during the course of a marriage belongs to both of you. If there’s a mortgage on your home or credit cards debts for example,  you are equally responsible for their repayment.

  1. Watch your credit score. If your spouse is opening credit cards and spending up a storm without paying the bills, even if you don’t know about it, you could be liable for the bills. Not only that, but your credit will be affected. Get a free credit report from one of the credit reporting agencies on a regular basis.
  2. Even though your divorce decree allocates marital debt to the other person, this does not mean that the responsibility for the debt goes away with it. If your spouse is supposed to pay off the mortgage that you got while you were married and falls behind, you are still responsible for getting it paid. Make sure the mortgage holder continues sending you monthly statements so you can monitor payments. Add an indemnity clause to your divorce decree. This will give you the right to take your ex-spouse to court if he/she doesn’t pay what was agreed to. Note this still doesn’t absolve you of the liability, but it gives you some recourse.
  3. You are responsible for taxes owed on any returns you signed in the past. I was recently told a story about someone whose spouse was hiding cash from her. In the course of the divorce negotiations, a forensic accountant uncovered enough information to imply that the tax return did not reveal the full extent of the marital income. In fact, she signed the tax returns too, and, had they been caught, she would have been equally culpable. As a ‘negotiating tactic’, the non-monied spouse agreed not to declare the cash to the IRS in exchange for a share of it. While she may feel vindicated, she has now become complicit in a scheme to defraud the government, whether she realized it or not. Unless you file an innocent spouse application with the IRS (in the above case she was not so innocent) and it is accepted by the tax authorities, you will have to pay back taxes and penalties on tax returns when asked.
  4. A mortgage can’t simply be transferred to one name. If you want your name off the liability, the party who will be paying the mortgage will need to refinance. The person who needs the mortgage will have to demonstrate that they can pay it off. The good news is that there are ways to transfer the mortgage, but it’s not as straightforward as you think. You’ll need to find a mortgage broker that can make that happen, and you’ll have to have good credit. You’ll also need to get the mortgage holder to agree to remove the mortgage from your credit report.

Don’t bury your head in the sand about your finances. Do your research, educate yourself and plan for all the possibilities.