We all recognize that divorce is challenging for a host of reasons. Divorce isn’t just emotionally costly. With the requirement to divide your estate in a fair way, we concentrate on the division of both your assets and debts – that can be financially expensive! I tell my clients that we are having to divide a pie and it is not possible to create two whole pies out of one single pie. This is a fact that is difficult for nearly every client.
Learn the basics of debt and divorce, so you don’t get caught off-guard in challenging circumstances:
1. The rules about marital debt varies from state to state. In some states, the name on the debt is the one responsible. In others, the debts are held jointly, regardless of whose name is on the account. In Arizona, all marital debts are usually divided equally between the couple unless one spouse can prove that the debt was incurred before they got married or by a party for reasons that do not in any way benefit the community like gambling, and other illicit activities.
2. Joint credit cards equal joint debt. If both names are on the card, both parties are usually equally responsible. And in Arizona, even if only one spouse applied for the credit card, both spouses can be sued by the company if they fail to make payment on the debt. It doesn’t matter if you never used the card and your spouse charged $10,000. However, the community debts are those that are incurred prior to being served with the divorce papers. After that, if you can trace the debt to one party, it will likely be that party’s debt upon the division of that party. If, however the purchase was used toward the upkeep of a community property asset then it belongs to both parties.
3. The courts don’t affect creditors. If your name is on an account, it doesn’t matter to your creditors what the court decided. If your name is on a credit card, car loan, mortgage, or any other debt, you are still liable. This means your ex’s failure to make the loan payment can negatively affect your credit, even if they were assigned the debt in your final divorce decree.
You can also still be sued for the debt. If your ex-spouse is responsible for the debt, you can then sue your ex-spouse for not honoring the agreement. It can be a big mess, but going back to court is an option that most people want to avoid once they are finished with their divorce matter.
4. The mortgage bank will remove one of your names from your joint mortgage only if one party qualifies to take the entirety of the remaining balance of the mortgage.
This is commonly the largest debt a married couple will have and often creates the most drama during a divorce. The parent with physical custody of the children will often want to take possession of the home however sometimes cannot afford that mortgage. There are solutions here, and unique ways of separating your assets can be reached through good negotiations, mediation and through collaboration.
5. Beware of signing a quitclaim deed. This deed does exactly what it says. It allows one party to give up all claims to a piece of real estate. It does not absolve one from the responsibility of ensuring the mortgage gets paid. You will lose any equity in the property and any use of the property. But you still have all the responsibility for the mortgage.
What should you do to protect yourself and your finances?
1. Divide the real estate by selling or refinancing the home to remove either party from the loan.
In most cases, selling the property is the easiest way to relieve mortgage debt. Both parties are then free of debt and responsible for their own financial future.
If one of you has sufficient income and credit, and there is enough equity in the home, refinancing is a possible solution to this commonly sticky situation.
2. Cancel any joint credit cards during the divorce process. Make sure you obtain current credit statements for yourself and spouse and carefully review them. The last thing you want to deal with is your soon-to-be ex charging up the card or taking out a large cash advance. Before canceling any card, be certain you have enough money or other credit to live on.
3. Pay off debts or convert joint accounts to individual accounts when possible. This will make the divorce process cleaner and easier. If you can’t do this, monitor your joint accounts and keep careful records.
Divorce is challenging in every way, and for most all people it is difficult financially. Planning ahead to manage and handle your separate and marital debts during the divorce process depends on the state in which you reside. A good divorce attorney can help to ensure that you emerge from the divorce in the best possible financial situation.
At McMurdie Law & Mediation, our goal is to help you separate from your partner in a way that allows you both to move on with your lives. Contact McMurdie Law & Mediation at 480-777-5500 today for a no-cost initial consultation and case evaluation.