Can You Divorce With Debt?

There are several things that people expect to grow during a marriage. Wealth, assets, family size and retirement accounts are all in the positive column. Growing debt is not usually on that list. But many couples find that debt grows quite well over the years. To make matters worse, now you want a divorce. Some folks would let the debt keep them in the marriage, thinking there is no way to separate the union without making things exponentially worse.

While this may sometimes be the case, there are many creative ways to address debt with a positive outcome when facing a divorce. The first thing you should do, talk to a Certified Divorce Financial Analyst®, CDFA®, practitioner. By looking at your big picture, a CDFA® professional can find options that you may not be aware of for addressing the debt with some of the assets that have grown over the years.

Where To Find Assets

One place to look is your home. Divorce is generally a time for both parties to consider downsizing. With the income that used to fund one household now funding two, it makes a lot of sense. Even if one party keeps the house, refinancing can be a great way to take out some equity in the house to pay off debt so both parties can start fresh.

Maybe between you and your spouse, the biggest portion of your wealth lies in retirement plans. Therefore, you don’t consider it to pay off debt without being penalized. Think again, the divorce process includes options to access the cash in qualified retirement plans without penalty even before you reach 59 ½. The cash that you take out will still be taxed, but through a Qualified Domestic Relations Order (QDRO), it can be used to pay off your debts.

Perspective

Now, let’s look at it from another perspective. You have already decided to face the debt and move forward with the divorce. You’ve simply decided to split it down the middle, just like you separate the assets. Divorcing couples need to keep in mind that the divorce decree is binding to the two married parties, not your debtors. So, if your spouse stops paying a debt in your name that they agreed to pay, the debtor will still come after you. That is why it is important to do what you can to pay off marital debt so that it does not come back to haunt you. At a minimum, be certain to include protections and triggers in the decree that help control the damage.

The key to handling financial issues when divorcing is having the proper people on your team. And it can be especially crucial when debt is involved. It can be the difference between a new life paying debt on your own, or a truly debt-free new beginning. And it can also include learning how to stay debt-free by sticking to that new after-divorce budget. Let us help you put the right team in place.