Tuesday, September 20, 2011
7 Tips for Dealing with Debt
Even before the current prolonged economic downturn, many divorces ended up focusing on how to manage the community debt. Some married couples are fortunate and keep debt to a minimum, but a more common scenario is that the marital debt is a significant issue to be addressed either in court or in settlement.
If you are using the Collaborative Law process to resolve a divorce, you will probably work with a neutral divorce financial planner. In litigated divorces, we sometimes bring in a financial planner to work with one side in the case, and sometimes each party hires their own advisor. Working with an expert like that is invaluable in analyzing tax consequences and preparing financial strategies for negotiations or for court.
With or without a financial advisor, here are some suggestions to consider in dealing with debt issues in a divorce.
1. Be realistic. Have an outsider, like a certified divorce financial planner, review your situation and make suggestions. Don't over-commit or be over-optimistic. Your lifestyle will probably be lower post-divorce and it may take a while to get back on your feet. If you're in a hole, plan to take some time to work your way out. Don't try to do it overnight.
2. Go solo and end joint accounts, if possible. Don't pay off and close your individual credit accounts. Make payments, but keep them open. On the other hand, try to close out any joint accounts so that you will not be affected by your ex-spouse's future payment history, or lack thereof. You need to separate your finances, just like you do the other parts of your life.
3. Don't rely on your spouse. It may take you a while to transition to full separation and independence, but you should continuously work for that. Your spouse may have good intentions, but things like a job loss, health problems or a new relationship, among other things, can come along, and suddenly financial performance doesn't match their pre-divorce words. As soon as possible, you need to be independent. Get an expert, if necessary, to help you come up with your own plan.
4. Close out joint bank accounts. For a while, they might be a way for the spouses to show their trust and commitment to each other, but that changes over time. You both need to be independent. There are plenty of ways with electronic banking to make quick payments and transfers, so you don't need joint accounts. Having separate accounts also improves your security and eliminates any temptation to get financial revenge of the spouse.
5. Refinance you mortgage, if you qualify. You can save money, build separate credit and help your ex-spouse rest easier at night. It also gives you more financial privacy.
6. First, pay off the smaller credit cards in your name. You should also continue making payments on all your cards, but concentrate on the smaller ones and knock them off as soon as you can by making extra payments. Generally, it's usually better to keep the cards open after they are paid off.
7. As a last resort, you can consider filing for bankruptcy. For that decision, you should consult with a bankruptcy specialist. Most family law attorneys in North Texas don't handle bankruptcies. Just like you should hire a family law specialist for a divorce, you should look for a bankruptcy specialist to help you evaluate your circumstances. There are serious consequences to filing for bankruptcy, so consider carefully as a last resort.
Divorce can be devastating on finances, but it doesn't have to be. Careful planning, taking a conservative path and getting expert assistance will help you make the right decisions on debts and other financial issues.
For some additional ideas, see an excellent article called, "Know How to Get Debt Free after Divorce" by Amy Lewis in Ben Stevens' South Carolina Family Law Blog (always a good source) from August 8, 2011.