A majority of married couples choose to merge their finances after tying the knot. While there are many benefits to combining assets, such as making money easier to manage and helping couples work together as a team toward long-term goals. However, when things don’t work out, splitting assets and taking on debt in divorce is no joke. Assets and liabilities are divided during a divorce. As far as who’s responsible for paying off debt in divorce, each state has particular laws. Some states consider what was brought into the marriage and others consider everything to be owned equally.
If you’re struggling with debt in divorce, there are ways to make some extra cash to help deal with it.
1. Pay off as Many Joint Debts as Possible before Divorce
Be proactive by paying off as many joint debts as possible before signing the divorce papers. This makes settlement negotiations much less of a headache. When it comes to joint debt, even if the court mandates debt obligations in the divorce decree, it doesn’t mean that your ex-spouse will make timely payments or that you’re protected from creditors.
If you and your spouse owe $15,000 on a car loan, you’re both legally responsible for paying it off. In this case, if your spouse loses his or her job or cannot afford to make payments, you’re still liable for all the debt. Any late payments may also hurt your credit score.
2. Look for Cash Resources to Pay Debt in Divorce
Look for any resources that you have to pay debt in divorce. This can be your property such as stocks, mutual funds, or a savings account. You can borrow against your retirement savings; or, if you’re keeping the house, a cash-out refinance can help pay off high-interest debt. Always consult a financial advisor and understand the implications before making any decisions regarding your cash resources.
3. Adjust Your Budget to Your New Financial Situation
To pay off debt in divorce, you need to rework your budget. If you were both working, your income may be cut by half or more. You now must rely upon your income, and you may be liable for alimony and child support if it was ordered by the court. You need to alter your household budget for your new financial situation.
Figure out how much income you have post-divorce and take into account every debt and liability. Allocate cash to essential expenses and use what’s left over to pay down your debt. If you don’t have enough, you’ll need to make some game changes.
A big pitfall when it comes to paying off debt in divorce is not adjusting your lifestyle to your new financial situation. This is why creating a budget and being aware of your finances is necessary.
4. Sell Your House
If both names are on the home mortgage, the best course of action is to sell the house and split the proceeds. While you’re still living in the home, try to agree with your spouse to see how much each party will put down toward the monthly mortgage payment. Once the home is sold, you can use this extra cash to pay down debt in divorce.
Another option is to buy out your spouse or be bought out. Mortgage debt may go to the spouse who earns more or who is awarded full custody of the children. In those situations, one person may need to buy out the other person.
5. Increase Your Income
Divorce lowers your income and can put you in a sticky financial situation, especially when you have debt. To help pay debt in divorce, consider getting a side hustle. A side hustle can be a great opportunity to earn some extra money while you take control of your financial situation.
6. Ask for Help When You Need It
When you don’t know what to do with your debt after the divorce is finalized, don’t hesitate to ask for help. There’s nonprofit credit counseling to help those in debt evaluate their finances and learn how to deal with debt in divorce. Credit counseling services offer:
- Help with basic budgeting
- A debt management plan to help pay debt in divorce
- Development of short- and long-term financial goals
Debt in Divorce
You can still rebuild after dealing with debt in divorce. It can seem scary, but you’re not alone. There are options out there for anyone struggling with debt after ending a marriage.