In Episode 3 of our Restorative Divorce Podcast, we cover How to Divorce with a lot of Debt. 

TO LISTEN TO EPISODE 3, CLICK HERE.

How to Divorce with a lot of Debt

[00:05] Erin Birt: Hey, thanks for joining us for episode three of our podcast called Restorative Divorce with the law firm of Aaron Burt. My name is Erin Birt. I'm the attorney and mediator at the firm.

[00:17] Tyler Birt: My name is Tyler Birt. I'm the paralegal at the firm.

[00:20] Erin Birt: And you also have an accounting degree, don't you?

[00:22] Tyler Birt: I do. So finances are straight up my alley

[00:23] Erin Birt: Cool. Well, what we do here at Restorative Divorce is we try to connect the emotional, financial, and legal so we can help you restore yourself post divorce. And today we're going to focus on the financial aspects of the divorce process: What do you do when you're divorcing with a lot of debt?

[00:54] Tyler Birt: Right.

[00:55] Erin Birt: That's a really scary situation that I think a lot of people face.

[00:58] Tyler Birt: Yeah, and it comes up a lot.

[01:01] Erin Birt: It really does. So much so that there was a joke floating around on the Internet, and I'm going to say it right now. Okay, so what does a hurricane, a tornado, a fire, and a divorce all have in common?

[01:19] Tyler Birt: What's that?

[01:20] Erin Birt: Four ways to lose your house.

[01:25] Tyler Birt: Very true.

[01:26] Erin Birt: And awful. Right? I mean, those other things are just… you can't control it, and it's just horrible to think about losing your house. In a divorce situation that's your go to, you're really scared about losing the things you've accumulated. And so today we want to talk about divorcing with debt and maybe some options about what you can do and what are the risks that you face when you're divorcing with a lot of debt.

[02:02] Tyler Birt: Yes.

TIP #1: Pull your Credit History Report

[02:04] Erin Birt: First and foremost, when I start working with somebody that either has no idea about their financial circumstances or they are the person that managed the household finances, I encourage them and ask them to run a credit report. And I do that for a couple of reasons. I think you can get a lot of information about your financial circumstances and maybe even your financial well being. Not enough of us probably run our credit report. We don't run it often enough. But when you're starting the divorce process, a credit report can help in many ways: It can help you learn more about your financial circumstances. It can help us, as your team members, working with you to identify are there any problems out there? Or even just see a summary of what accounts are open, what credit cards are out there? Are there things that we need to look into further because you had no idea that maybe your spouse had opened a credit card and run up thousands of dollars of debt. So the first thing I like to do is tell people before we get started, have you run a credit history report and if you haven't, can you go ahead and do that and tender it to our office? We obviously keep that private and confidential, but it's a really good starting point before they even start gathering documents and tendering documents to us. It can really point us in different directions.

[03:38] Tyler Birt: These days, it's really easy to run your credit report to get a credit report. Back in the day, nobody knew how to do it. It was very secretive about credit reports. But as they've changed laws, they've changed rules, you can have like a daily summary of your credit.  I think it's once a year or so you can get a free full report from the three credit union credit reporting agencies for free. So it's not as hard as it used to be.

I think back in the day, when we would ask people to run their credit, they didn't know what to do and luckily, these days, they can go online and do it. You don't have to call anybody, you don't have to do anything. So it's useful. But you're right, it's a very good starting point for identifying assets and debts.

[04:51] Erin Birt: Hopefully we avoid some unwanted surprises, or hopefully there are no surprises, and we at least use it as a starting point to determine and identify what debt is out there, what assets are out there.

I think it's a really good starting point for anybody listening: If you haven't done in a while, run your credit report. Keep a copy of that. We would like to see it. Any attorney or mediator you work with may want to see it as well, and it can help keep you organized.

Options for Assets Tied to Debt

A lot of what you accumulate during a marriage, it can be an asset, but usually it's tied to a debt as well. Right? So you've got your house. Most people have a mortgage or line of credit or a second mortgage on that house. So usually your asset is tied to a debt. Your cars, a lot of people have a loan for their vehicle. And there's really only so many tools we have to help you in a divorce, address your debt that's tied to it. I want to highlight kind of the three options we have. The easiest way to have a clean cut of debt that's tied to an asset is sell that asset.

[06:11] Tyler Birt: Right.

[06:11] Erin Birt: And hopefully you're selling it for more than the debt you have. But that's the cleanest way to say I have no financial ties to this asset or this person any longer.

[06:26] Tyler Birt: Well, and I think that is how the joke that you told at the beginning kind of works. Because most, not everybody, but a lot of people, their house is their asset. And like you said, with assets being tied to debts, the best thing to do is get rid of debt when you're getting divorced. And you do that with the house. It's not the only thing to do, but a lot of people, a home is the main thing that you want to build a family, it's a place to be.

[07:18] Erin Birt: But with that said, having an attorney just tell you because it's simple, sell your house - usually doesn't meet the goals of the client, right? Most people are like, hey, you know, I like my house, I want to keep my house. My children are accustomed to this house, I raised my kids here. So then we have to look at other options and that is probably refinancing. If you have a debt associated and both names are on this debt, you're going to have to look into can you refinance? Here at our firm we network with trusted professionals that can help you determine, under the very specific circumstance of divorce, if you can qualify to refinance.

It's my understanding that there's packages out there specific to people going through a divorce to refinance their house that they might not have known about. So we can always give those referrals to trusted people that can do a financial analysis and help you learn what your options are to try to meet that goal of “can you keep your house?” “is it really financially responsible for you to keep your house?”

So if we're dealing with debt, and in this illustration it's the house we've got, sell it and split the cost. However, if the outcome of your divorce is you have to split the costs, or not the cost, but the equity that you earn: you can refinance any debt associated with that house.

See if you can even keep the house, buut then there's that other part of: you have to be able to give the equity or the value that your spouse also has accumulated in the house. So it can be really tricky getting rid of debt if you don't want to sell the house because you're going to have to refinance most likely sufficient to buy out your spouse. Meaning if they get $30,000, because that's their 50% equity share in the house, you either need to come up with $30,000 in other assets to offset that or you have to refinance for enough money to be able to provide your future ex spouse their equity interest in the house. So it can get really complicated, but it's not something that we can't overcome and we have a lot of people that will help.

[09:47] Tyler Birt: We're learning every day there are products out there from professionals that we know that address that situation.

[09:56] Erin Birt: Yes, and in a future episode we're going to have a mortgage broker and financial professional come and share what those products are or options are. So stay tuned. Hopefully next month we'll be able to have a podcast devoted entirely to house refinance, mortgage and also a little bit just about financial planning to see if it's in your best interest to keep that house.

But going back to some options for debt, even the illustration of a car or a vehicle selling, it's always there. Refinancing the loan is always there, or finding a different way to keep it and buy out that asset interest. If you've got another account that you can say, I'm going to keep my car, but I'll give you $5,000 for it, then we will ensure your documents, your backup plan, says what exactly needs to happen, what documents need to be signed to have the other person release any claim they have in your house, in your car.

Other ways that you can reduce debt, if at all possible, is using marital assets to pay off your debt. What are your thoughts of people taking, I don't know, maybe they're hard earned money from bank accounts, and just paying off their debt? Do you think that that's a good idea upon divorce?

[11:25] Tyler Birt: Yeah, upon divorce, I think it's always beneficial let me write it a different way. It's always beneficial to reduce debt. However, depending on your financial situation and everything, debt is not always bad, right? As we talked about having a mortgage on a house, it's not a bad debt. It's a debt. But you have a house also, right?

[12:00] Erin Birt: And it's building your credit score.

[12:06] Tyler Birt: It doesn't equal bad. Right? Debt doesn't always equal bad. However, when you're getting divorced, yes, you're taking your hard earned money and but you're better in your situation for the future, right? Because you've been in a relationship that has broken down and so there's all that emotional aspect of the breakdown of a relationship. One thing we like to do is get people into their new phase of life in the best way possible. In a situation of divorce, I think it's always better to minimize debt that you have coming out on the other end. But again, it all ties together and that's why people look to us look to you for guidance on the best way to do that.

Credit Card Debt

[13:04] Erin Birt: Let's talk about credit card debt.

[13:07] Tyler Birt: Yes.

[13:09] Erin Birt: Lots of families, especially these days, are racking up a lot of credit card debt in order to just maintain either their standard of living or to be able to provide things for their children or themselves.

They often come to us and say, I want to get divorced, but we have a number of cards out there with some high balances on it, what do we do right now? That can get complicated because it's not like a house where we can say, we'll work with our trusted appraiser to tell you what the value is or our trusted real estate agent so that you can sell it for the most that you can get to pay off debt. It's not like a car with a loan that is just tied to that car. It is a credit card that has been used for a thousand different reasons. And so that can make your divorce a little bit more complicated because you either can agree: “yeah the $20,000, was accumulated during our marriage, it was customary that we would have this balance, it was all for the marital expenses, house expenses, children expenses, and we'll find money somewhere to pay this off.” That's an easy way to approach it. And that can take a couple a long time to come to that realization that that's the realistic outcome of that.

Other families might say, “I'm surprised after running my credit report or after getting financial disclosures, I'm surprised to learn that there's a credit card out there with $20,000 on it. I want to go through and see what all of those charges are for.” So there's more analysis, I think, that goes into the credit card if somebody is objecting to the balance or objecting to what it was used for.

[15:20] Tyler Birt: Sure.

[15:21] Erin Birt: Right?

[15:22] Tyler Birt: Sure.

[15:22] Erin Birt: So if you have high credit cards, I would say start looking through the itemization of the transactions. If these are all customary for maintaining your house or other activities or things of that nature, most likely we're going to have to find a way to either resolve that or allocate that debt to one party or say over a certain amount of time you have to pay off this debt because it's a joint debt.

But there's homework to be done if you have credit card debt to really look at those transactions, make sure that you're either comfortable with them or if you have an objection, then we need to analyze that further and see what do we do. Does the objection mean it's attributable to the other person that made that surprising transaction that isn't related to your family or to maintaining your home or other obligations? I find most divorces, they might end up selling their house and then using equity to pay off credit cards. Yeah, that happens a lot.

[16:33] Tyler Birt: And I think that's what we in the business tend to look at first. Right, is the house, what equity is in the house? Because that fixes, for lack of a better term, a lot of the debt issues when going through a divorce.

Retirement Asset Loans

[16:58] Erin Birt: A lot of people are taking loans against their retirement plans. That's to either to refinance, in a sense, or to eliminate debt. And we have to be very careful because we're not retirement plan specialists, and depending on the type of loan you took out, you might have only a short amount of time to pay that back and then you have, like you said, taxes and fees and other things attributable to it. But it is an option.

I think the important lesson is that if you're divorcing with a lot of debt, whether that be house, car, credit card, retirement loans, other forms of debt, that it would be really beneficial if you work with a certified divorce financial planner or your CPA. Or a financial professional that can come up with a good financial plan for how can you eliminate debt because it's really easy for us to say we're just going to use marital assets to eliminate debt, but that might not meet all of our clients goals.

[18:10] Tyler Birt: Right.

[18:11] Erin Birt: There's emotional attachments to certain things and sometimes people say, “it might not make the best financial sense, but I really want to keep that asset and then what are my options?” So having that team approach, a lot of people balk at it, but in the long run, it can save you money because it's somebody that can tell you, yes, you can do it, and here's some options. Or if you don't want to use a financial planner to help you with that, it might cost you more in the end because you might have to just keep that asset, keep the debt, and then you're left after divorce having to manage all of these things without any further assistance. And that's not my hope for any client. I don't want that. We here want everybody to enter the next phase of their life with the tools that can help them succeed.

If you're divorcing with a lot of debt, there are options out there, however, if you have particular goals about what you want to keep in a divorce or what you can't eliminate, if you can't pay off debt, it'd be a really good idea to sit down and work with a financial professional to come up with an appropriate plan to meet your goals. And having a relationship with a financial professional helps your divorce and helps you after so that you can restore your finances after you go through a divorce. Right?

[19:40] Tyler Birt: Right.

Close Joint Accounts and Joint Credit Cards?

[19:42] Erin Birt: So another option that people have is if you find a way to pay off all of your debt, to then close all of those credit cards or close any account that you may have shared with your spouse. What do you think about that? Just trying to eliminate everything and close every account.

[20:07] Tyler Birt: Unfortunately, today everything works on credit reports and that's why we asked for them in the beginning, because there's implications to everything that you do now. You're going to buy a new house - the mortgage companies are going to go back and look at your credit and they're going to see if I closed all of my accounts 30 days ago. Your credit score takes hits on hits. It goes up and down and up and down. And those are negative factors, that well, can be talked through. And maybe that's a possibility, not being a credit professional, I mean, that could be a possibility. Yeah, we closed all these accounts, but here's why. And mortgage companies, for the most part, they have their rules, but they have certain exemptions, they talk through every situation. But it's got to be a matter of preference (for a client). What does your short term, mid term future look like? Because while, yes, closing accounts affects your credit report, it doesn't affect it forever and it's not the worst thing, right?. It's a negative impact, but it's not keeping debt that you can't pay for or not paying your debt -- not making monthly payments is worse than closing accounts, right? So there's give and take and that's what professionals come in need.

It also depends on how the divorce goes, right? If two people really don't like each other, they don't want nothing to do with that person ever again, they'll get rid of everything.

[22:06] Erin Birt: Closing accounts is probably the best option at that point.

[22:09] Tyler Birt: Anything to get somebody's name you don't want to see anymore out of it. That's how you do it. You refinance, you close accounts, you make everything your own again. But I would say just closing accounts is not always the best option.

[22:30] Erin Birt: A lot of financial planners that I talk to about trying to preserve your credit score so that you can qualify for getting a town home, a condo, a new single family home, or just moving on, a lot of them do discuss - Let's try to allocate debt to one party and have the marital settlement agreement reflect that the debt is attributable to that party and both parties will cooperate with removing the name of the party that's not being allocated debt for that account or that card. Your backup plan is that you have a marital settlement agreement that spells out exactly what should happen and that's an enforceable document. The financial planners do tend to say if we can keep accounts open, but know that we're still severing liability between the parties, that can at least help restore or keep a decent credit score.

Risks of Divorcing with a lot of Debt

There are options out there to try to minimize that negative effect. We've talked about some of the options you have about selling marital assets, refinancing debts associated with marital assets, making sure you're refinancing debt in your own name if you're keeping that debt, possibly closing any joint credit cards or joint debt that you might have with the other party. But what are the risks? What if you can't do that? What if you don't have marital assets to pay off debts? What if you don't have the ability to quickly remove somebody's name because they haven't paid their percentage of that debt that's owed? What are the risks? Well, it's as if you entered a contract with another third party. If your ex spouse defaults on the loan or stops paying it and your name is still on it, you go through the same process anybody else would about liability and your obligation to pay that debt. So there's a huge risk that unfortunately that I think a lot of families have to take is keeping their names on debts for a certain amount of time.

And what's your backup plan? I think your backup plan at that point is if you can't work it out, or have the trust that you each will contribute towards that debt, your backup plan is your marital settlement agreement. If you spell it out in your marital settlement agreement, that wife is supposed to get debt and once the debt is paid off, then both names are off of that debt, if she defaults on it, the other spouse could go into court and say, “there's a marital settlement agreement here that says this is her responsibility, she didn't pay it, perhaps I paid it to avoid legal action or avoid foreclosure”. So guess what? Now, in divorce court, I'm going to ask that she pay me back and she pay my legal fees. So it's a sticky process, but your backup plan is your marital settlement agreement. Your backup plan is the court being able to enforce and hopefully give you your attorneys fees if you're in the right, and if you have to go back to court and clarify everybody's roles about a particular debt.

So make sure your marital settlement agreement is detailed with whatever option you have to take. If both of you have to stay on a debt, your marital settlement agreement needs to reflect that and reflect what happens if something goes wrong.

Best option out there - try to use marital assets to eliminate as much debt as possible. And if that doesn't seem to work or can't work, I think working with a financial professional, even if it's for one session or two sessions, definitely worth your investment in the long run if you have certain goals that you want to meet that perhaps selling assets or using marital assets to get rid of debt can't be accomplished.

We've covered a lot about debt here. We're going to do it again in the future because it is a really big issue, especially these days with the difficult financial circumstances everybody is facing. We're going to highlight more financial issues down the road, whether that relates to what does a divorce financial professional do, what options do you have out there as they relate to real estate or mortgages that you may have - so stay tuned. We'll have other professionals also joining us to give you information that should help you restore your finances and move on to a better chapter of your life.

Thanks for joining us.

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