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Managing Debt While Contemplating Divorce | Financial Planning Tips

Managing Debt While Contemplating Divorce

As a family law attorney, I understand that deciding to divorce is one of the hardest decisions most people will make in their lives. This decision becomes even more difficult when the couple has taken on substantial debt. No one should ever feel trapped in a relationship, but it is important to understand the financial implications of divorce so one can better prepare.

Often, property acquired during the marriage is considered marital property. The flipside of this is that debt acquired during the marriage is often considered marital debt. That means that each person in the marriage has an obligation to contribute towards repaying that debt. When the spouses divorce, the debt will be divided between them.

Importantly, while each spouse has an obligation to contribute towards the marital debt, there is no guarantee that a divorce court will divide the debt equally. The court will likely consider the income and financial resources of the spouses (including spousal support), as well as their respective earning potential. Simply put, courts are hesitant to order what people cannot pay.

Let’s use a hypothetical couple to illustrate this point. Frank and Francine were both management consultants when they met. Francine left her job after the birth of the couple’s child and spent the next few years caring for him. Once their child was able to attend daycare, Francine went back into the workforce. However, Francine decided to try a new career and began her own business. She enjoyed the hours and work more, but earned much less.

Now that Frank and Francine are considering divorce, they must deal with their credit card debt, car loans, and mortgage. Frank doesn’t want to keep the house, but Francine can’t afford it on her own, even with spousal support from Frank. They can’t short sell it, so they will have to take a loss on the sale and keep the remaining mortgage debt. Odds are Frank will pay the majority of that mortgage debt.

The divorce judgment ordered Frank and France to each keep the car they primarily drove and to share the credit card debt equally. However, the divorce judgment also awarded Francine spousal support. This is somewhat common for people like Francine, who give up their career for the benefit of the family. Unfortunately for Frank, while the parties will be dividing the car loans and credit card debt equally, his spousal support payments will be greater than what he would have paid had he kept the debt himself.

What could Frank have done differently? Well, he certainly could have worked for a lower spousal support order, either through negotiations or litigation. Unfortunately, both of those processes involve additional attorneys’ fees and neither offers any guarantee of success.

Frank’s best bet would have been to start reducing his household debt the moment he started thinking about, or discussing, divorce. That means making additional payments on the credit card and on the car loans. It also means talking to the bank early about any steps he and Francine might be able to take to refinance the mortgage.

Perhaps the most important thing Frank could do in this scenario is remain civil and conversational with Francine. When people try to spite each other in a divorce, more often than not, everyone loses. Attorneys’ fees pile up and the emotional toll on the parties becomes unbearable, to say nothing about the financial repercussions.

If Frank and Francine are able to cooperate throughout the process, it’s possible they can find a solution that will allow them to address their financial obligations while also maintaining their standard of living, perhaps by restricting their household budget in advance of the divorce. Francine might have agreed to take on more of the debt or perhaps the parties would have agreed to apply any joint assets they had towards paying down their financial liabilities. The court system will use basic tools to address the parties debt, typically spousal support and dividing it consumate with the parties’ respective incomes. However, when negotiating with one another, Frank and Francine will have more options.

Discussions about the divorce and a couple’s finances should be had early in the divorce process. It is my preference that, where possible and appropriate, spouses discuss divorce and its implications in advance of hiring an attorney. This will not only speed up the divorce process, but it will also help the parties reach a more balanced and beneficial settlement.

There’s no way around it: divorce can be tricky and complicate your financial health. It’s always smart to work with a family law attorney and, if possible, a financial planner. Nonetheless, the first steps begin in your own home.

Joshua E. Stern is a family law attorney in Evanston, Illinois and the owner of the Law Offices of Joshua E. Stern.

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