Opening discussions in any mediation or collaborative divorce typically center on topics like the children, the house, the savings account, retirement funds, etc. Very few include things like the amount of debt accrued within the marriage. Perhaps it should.
Whether it’s mediation or a collaborative divorce, the most common types of debt I encounter are:
- Student loans
- Credit Cards
In a divorce, student loans tend to stay with the person who took out the loan. So, if your spouse had a student loan, that debt would be his/hers after the divorce. If, as a couple, you are involved in helping out your child or children pay off their loans, that needs to be negotiated as part of the divorce.
Many couples file joint tax returns. Therefore, if there is a debt, according to the IRS, it is owned by both spouses. And the IRS can decide to collect the whole thing from whichever spouse has the most or easiest-to-reach assets.
Sometimes one spouse handles tax preparation and payment and the other spouse may not be aware of a debt. In either situation, it is crucial to find out whether there is tax owed and how much so that the tax debt can then be part of the negotiation.
Credit card debt can present a real challenge when it comes to mediation or collaborative divorce and there are many layers to this onion.
As a mediator, you hope a couple that agrees on who incurred the credit card debt and whether it was used by the family or to the benefit of only one spouse. Generally, responsibility for the debt goes to both spouses if the family benefited and to the charging spouse if he or she benefited. But this can get tricky.
Defining who pays the credit card debt takes into consideration many variables. For example, is it a jointly owned card? That means did you apply for the card as a couple. Many credit cards give you the option of adding your spouse as a second cardholder after the fact. That’s technically a little different because his or her name is not on the application and therefore they are not legally responsible for the bill.
So, when assessing who gets the debt from credit cards, we first look at whose credit card it is. For joint credit cards, the negotiation can include a purchase-by-purchase assessment. This is where you classify a purchase as for one of the two spouses or one something purchased that benefitted both parties. For example, booking airline tickets for a trip you took as a couple would be owned by both of you. The credit card debt for a flight for a golf weekend taken by one spouse might be owned by that party.
Other items that could be considered marital purchases would be groceries, household items, home repair products, etc.
One of the benefits of collaborative divorce as it pertains to debts of all kind is that a financial planner is typically involved as one of the team members. This helps both parties come up with an accurate assessment of the divorcing couple’s current financial status and that aids in the planning of settling debts.
In mediation, debts can take on a more delicate nature if the parties are not aware of each other’s spending. Full disclosure of any and all debts is key to making the mediation go smoother.
One key objective in any type of divorce—litigation, mediation or collaborative—is that the parties should agree on who keeps which credit card and that only the name of that person be on that particular credit card account. There should be no credit cards held jointly at the end of the process.
No matter how amicable a divorcing couple might be, negotiations always have the potential for contention when resolving difficult issues such as dividing debt. Putting all your cards (pun intended) and your debts on the table is the best way to ensure that you reach a resolution that both parties can live with.