Top Five Mistakes to Avoid During a Debt Division

Going through a divorce is a challenging process, and one of the most complicated aspects of it can be dividing debts between spouses. Unlike asset division, which often involves tangible items like homes or cars, debt division can be tricky. If not handled properly, it can lead to ongoing financial issues long after the divorce is finalized. Understanding the common mistakes made during debt division and how to avoid them is crucial for a smoother, more equitable separation.

Not Understanding the Full Scope of Debt

A common mistake many individuals make during divorce is failing to fully account for all debts that are part of the marital estate. It’s easy to overlook certain liabilities, especially if they are in one spouse’s name or hidden under joint accounts.

Before starting the debt division process, it’s essential to take inventory of all marital debts. This includes:

Credit card balances: Even if they are in one spouse’s name, debts accrued during the marriage are typically considered community property in California.
Mortgages: Any outstanding mortgage on the family home or other properties must be divided.
Personal loans: Loans that were taken out by either spouse during the marriage must also be considered.
Student loans: While federal student loans are generally considered the responsibility of the borrower, state law and how the loan was used during the marriage can impact division.

Be sure to gather all financial documents, including bank statements, credit reports, and loan agreements. If you’re unsure about the full scope of debt, it may be worthwhile to work with a financial expert or forensic accountant.

Failing to Consider the Long-Term Impact of Debt

Another mistake many divorcing couples make is failing to think about the long-term financial impact of the debts they are dividing. It’s easy to get caught up in the immediate need for a quick resolution, but considering how debt division will affect your future finances is critical.

For example, while one spouse may agree to take on a larger portion of the debt in exchange for certain assets, they might not fully consider the consequences of those obligations on their credit, tax status, or ability to qualify for future loans. Additionally, certain debts may have longer-term consequences, such as credit card interest, mortgage payments, or loan penalties that could take years to pay off.

Take time to assess not only the division of debt in the short term but also how it will affect both parties’ financial stability in the future. If one spouse is given more debt but is unable to manage it, it could affect their ability to make other significant financial decisions moving forward.

Ignoring the Impact on Credit Scores

When dividing debt, many spouses do not fully consider how the process will impact their credit scores. Debt division doesn’t automatically mean debt responsibility is transferred to the person who receives it in the divorce agreement. Creditors may still report missed payments to both spouses’ credit reports if both names are on the account.

For example, if one spouse is awarded the family home and agrees to take over the mortgage, but fails to keep up with the payments, the credit score of both parties may suffer. The same can apply to credit card debt or car loans. Even if the divorce agreement states that one spouse is responsible for the debt, the other spouse could still be impacted by late payments or defaults if the creditor reports it.

To avoid damage to your credit score, take the following steps:

Close joint accounts: If possible, close joint accounts and transfer balances to individual accounts.
Refinance loans: If a spouse is taking on the mortgage, refinancing the loan in their name alone can help ensure they are the only one responsible for payments.
Monitor credit: Both spouses should monitor their credit reports to ensure no erroneous information is being reported.

Agreeing to Debt Responsibility Without a Plan for Payment

Sometimes, divorcing spouses agree to take on specific debts without considering whether they will be able to pay them off. This can happen if one spouse is awarded more assets and agrees to take on more debt to balance the division of property. However, without a solid payment plan, this can quickly become a financial burden.

Before agreeing to any division of debt, make sure you have a clear understanding of how each debt will be paid. For instance:

Mortgage payments: If one spouse is awarded the home, will they be able to keep up with the mortgage payments without assistance?
Credit card payments: Who will be responsible for making payments on outstanding balances, and how will that affect monthly expenses?
Personal loans: Are there any loans that need to be paid off immediately, or can they be deferred?

It’s critical to evaluate each debt and consider your current income and ability to pay. If one spouse cannot reasonably afford the debt, it’s important to negotiate a solution, such as refinancing, selling assets, or requesting that the court modify the division.

Not Getting Legal or Financial Help

Lastly, one of the biggest mistakes people make when dividing debt in a divorce is not seeking professional help. Divorce is complex, and debt division can be even more complicated, especially if there are high assets or significant liabilities involved. Trying to navigate this process without the guidance of legal and financial experts can result in costly mistakes.

A family law attorney can help ensure that your rights are protected during the divorce process. They can help you understand California’s community property laws, which state that debts acquired during the marriage are typically split equally, and they can ensure that the terms of the division are fair and reasonable.

Additionally, a financial advisor or forensic accountant can help you understand the long-term implications of the debt division, how different assets and debts might impact your future, and provide guidance on creating a realistic payment plan. If you’re dealing with complex financial issues, these professionals can help you avoid costly mistakes and reach a fair and equitable agreement.

Conclusion

Dividing debt during a divorce can be a complex process, but by avoiding these common mistakes, you can ensure that you make informed decisions that protect your financial future. Be thorough in accounting for all debts, consider the long-term effects of debt division, monitor your credit closely, and ensure that you have a clear plan for how debts will be paid. Finally, don’t hesitate to seek professional advice from both legal and financial experts to help you navigate the process effectively. With the right approach, you can move forward from your divorce with a clearer financial path.