Do You Have Few Marital Assets But Plenty of Debt? How Can You Ensure Your Divorce Settlement Remains Equitable?
Making the tough decision to file for divorce from your long-time spouse can be one of the most difficult transitions of your life— particularly if you're leaving a high-debt marriage and are concerned about your ability to rebuild your financial future on a single income. While many divorce how-tos focus on the equitable division of assets, dividing debt in a fair and efficient way is equally as important. Being saddled with marital debt can cause resentment and regret, and it may even impact your ability to remarry. Read on to learn more about the equitable division of marital debt as well as some of your options if you're concerned about the effect this debt will have on your ability to rebuild your new solo life.
What should you consider when dividing marital debts?
Ideally, both you and your soon-to-be ex-spouse are represented by an attorney who can help you advocate for your best interests and work with the other attorney to negotiate a settlement that is fair and that adequately represents both the assets and debts you each brought into the marriage. Trying to go the do-it-yourself route to save money on legal fees can often lead to financial hardship in the long run.
Here are some factors you'll want to consider (and questions you'll want to ask) when meeting with your attorney.
- Is bankruptcy an option?
While you may be reluctant to add a bankruptcy filing on top of your divorce, in some cases doing both may be the cleanest and easiest option to help wipe the slate clean and begin your life again. This is especially true if your marital debt levels were high enough to cause your credit score to drop or, worse, lead to missed payments. Filing a Chapter 7 bankruptcy to eliminate unsecured debts and reaffirming debts you'd like to keep (such as a car or a home) can help you move on without spending a disproportionate amount of your future income paying back past debts.
- How should taxes be filed?
While you may assume you'll need to file as "single" following your divorce, in some cases it can save both you and your ex-spouse a substantial amount of money by continuing to file jointly for the calendar year in which your divorce was finalized. For example, if your divorce was made final on December 15, 2015, you should be able to file your 2015 taxes as "married filing separately" in 2016. This process will require some cooperation from (and communication with) your ex-spouse, but is often well worth it in terms of money saved.
How can you dispose of a jointly owned house that is worth less than you owe?
Dividing a house can sometimes be a difficult prospect even when there is plenty of equity. Often, one spouse will choose to keep the house and "buy out" the other spouse, refinancing the loan in his or her own name to remove the bought-out spouse from the title and mortgage. However, in cases in which the home is underwater (worth less than the amount owed) or the costs of refinancing can't be rolled over, you and your spouse may need to make a tougher decision.
Depending upon the sale and rental market in your area, it may indeed make sense for one of you to keep the home—and rather than buying out the person leaving the home, you may even be able to secure a small buyout of your own in exchange for keeping an asset worth less than you owe. You'll be able to use this buyout to lower the amount owed on the mortgage and improve your ability to refinance to remove your ex-spouse's name from the title and mortgage. In other cases, a short sale or deed in lieu of foreclosure may be the most hassle-free option for both of you, allowing you to walk away free and clear without worrying about staging and selling your home.