Dividing up the assets is the easy part of your divorce; everyone likes to take cash, investments, pension assets and real estate. It is quite another issue to split the debt; particularly credit card debt.
The theory is that everything is split 50/50 (equitably in NJ) in a divorce. When you are preparing for your divorce keep in mind that sharing the debt is not as easy as splitting the bank accounts. The mortgage usually goes with the house but if you have credit card debt, car loans or lines of credit, this can be a real stumbling block. Nice idea that half of your debt will go away in a divorce but what happens when the other side does not have the income to service the credit cards? If they cannot pay, making them responsible for the debt will not work. If you put it into your property settlement agreement and then they cannot get the credit card debt into their name or make the payments, you will just have post judgment problems. Need to develop alternatives to find a way out.
When the incomes of the parties are modest the ability to get new credit can be difficult, or impossible particularly if there is already significant debt. So how do you make this work?
First you need to take a hard look at how much debt there is and what the monthly payments are. Once you have the facts look at what is really doable from an income perspective. How much can you afford to pay? How much can your X pay? If the lower income party’s disposable income is only $1000 they will not be able to pay for very much debt.
So what can you do? From cleanest to messiest some ideas:
- Sell everything that can be sold and start fresh, clean slate for both of you. Sell the house, the boat, the stocks and bonds and anything else that is needed to pay off the debt and walk away debt free.
- Split the debt on the basis of incomes and share assets in the same percentages and let each person make their own choices as to what is sold on the proviso that this will result in each party being clear of joint debt.
- The parties trade off paying/receiving alimony for a shifting of the debt burden.
- Agree to future considerations – The first $___ of next year’s bonus goes to pay off the debt. This will work only if there is a real willingness to co-operate.
The big lesson is that getting into too much debt is a significant problem. Take divorce off the table and it is still a huge problem.
This gets back to the very first thing that I do with my clients; I make sure they understand where they are spending their money. Down to the last penny. If folks are using credit cards to finance a lifestyle at least they should be aware of it. Financial empowerment does not mean you have to change everything; but it does mean that you can make conscious decisions about your spending.
As always, if you have any questions I would be delighted to be of service. Respond to the blog or drop a question in the contact section of my web page.