In our article Myths about Divorce Decrees, we touched on the fact divorce decrees do not relieve either party of joint financial responsibility. The purpose of divorce is to split off emotionally, and financially, from your ex-spouse. If you aren’t careful, your spouse’s handling of your once-joint accounts can haunt you for years. If you had joint debts that existed before your divorce, and these accounts are not both paid off and closed, you are just asking for trouble.
Also, although some divorcing couples definitely are out to get each other, most problems with joint accounts prior to divorce are caused by ignorance, not malicious intent. Don’t think that just because your split is amicable problems can’t occur. Taking precautions can protect BOTH of you.
Here are the typical joint accounts which many married couples share and what you need to do with each before you get divorced.
Mortgage Loan
Handling your home loan should be your first priority. It is vital to not walk away from a divorce with the mortgage in both of your names. Here are possible ways to cope with joint homeownership, listed from most preferable to least:
- Sell the home. Make sure the sale occurs before the divorce, especially if your ex is living in the house during the divorce proceedings. If you have an agreement to sell (the house has not yet sold) at the time of your final divorce, and your spouse is secretly opposed to selling it, he can make it very difficult for a realtor to show or list the home, dragging out the sale indefinitely. In the meantime, you are responsible for the payments and your credit is in jeopardy. It’s actually best to have the house empty during the sale of the home; if possible, both of you should be out of the house before it goes up for sale.
- Have one spouse refinance the home in his/her own name. If one spouse is to keep the house after the divorce, insist that your soon-to-be-ex obtain new financing in his own name. You can’t just call up the mortgage company and say, “Hey, I’m getting divorced, can you take my spouse off the loan?” Your lender is going to insist on having your ex go through the formal loan process to qualify. Do not let the final gavel sound on your divorce papers before the house has been through the refinancing process. Having your spouse show you loan approval papers is not enough; last-minute glitches that prevent loans from closing occur every day.
- If selling or refinancing isn’t an option. This is the worst possible option. Try to avoid it at all costs. If moving out of your joint home is going to cause hardship to your ex (and/or your kids), and he is unable to refinance the home on his own, here are some things you can do to protect yourself:
- Don’t take your name off the title. If you take your name off of the title (using a quitclaim deed), you are removing ownership but not loan responsibility, a very dangerous situation. This also means that you will not be able to split the equity in the home at the present time.
- Place a limit on how long your ex can stay in the house before it will be sold or refinanced.
- Notify the mortgage company of your change of address and have all statements and coupon booklets sent to your new address (also, see if you can get your ex to mail the payments to you). At the very least, inform the lender that you wish to be notified if the payments get in arrears. In this way, if your ex is late on payments, you will be notified and have the chance to make up the payments.
Automobile Loans or Leases
This is the second most important item in need of your attention because car loans are the second most important kind of financing on your credit report after your mortgage. As you will notice, my suggestions for handling joint car loans are very similar to those for a joint mortgage. Here are possible ways to cope with joint car ownership, listed from most preferable to least:
- Sell the car. Make sure the sale occurs before the divorce. If you just have an agreement to sell (the car has not yet sold), you are responsible for the payments and your credit is in jeopardy. If the car is upside down (meaning you owe more than it is worth), it’s still better to sell the car at a loss than to risk your credit. The difference between good and bad credit can be worth thousands of dollars in interest and fees per year on future financing.
- Have one spouse refinance the car in his/her own name. If one spouse is to keep the car after the divorce, before you get divorced, insist that your soon-to-be-ex obtain new financing in his own name. As with a mortgage, your lender is going to insist on having your ex go through the formal loan process to qualify. Do not let the divorce process complete before the car loan has been completely through the refinancing process.
- If selling or refinancing isn’t an option. This is the worst possible option. Try to avoid it at all costs. If selling the car is going to cause hardship to your ex (and/or your kids), and he is unable to refinance the car on his own, here are some things you can do to protect yourself:
- Don’t take your name off the title. If you take your name off of the title, you are removing ownership but not loan responsibility, a precarious situation to be in.
- Place a limit on how long your ex can have possession of the car before it will be sold or refinanced.
- Notify the car finance company of your change of address and have all statements sent to your new address (also, see if you can get your ex to mail the payments to you). At the very least, inform the lender that you wish to be notified if your ex isn’t making the payments.
Separate Joint Credit Card Debt
Most people think that “closing out” joint credit card accounts is the end of the headache. Unfortunately, they forget that the account is not really closed out until any balances are paid off. Even worse, it’s very easy to reopen accounts if the accounts are being paid on-time – credit card companies encourage this. If you cannot pay off and close the balances immediately (it may be difficult to legally divide up debts that have not been paid off, check with your lawyer), here are some solutions for getting rid of it, listed from best option to worst:
- Sell a joint asset (perhaps your home – kill two birds with one stone) and pay off the debt, then close the account.
- Apply for a separate credit card for each of you and have agreed-upon amounts transferred into these sole and separate accounts from the joint debt accounts.
- If your spouse can’t qualify for credit on his own, get one of his relatives to co-sign on a new card, then transfer the balances.
Note: If you have debts that don’t fit into the above categories, use this simple rule of thumb: After a divorce, all of the joint debts you had should be closed and paid off; all of the assets you owned jointly should be sold. No exceptions.
