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Case Study

My case study below was published in
Marcia DeLean Houck’s book


 

Living Life After Divorce & Widowhood:
Financial Planning, Skills, and Strategies for
When the Unthinkable Happens


Case Study – Credit Matters

by Lisa C. Decker, CDFA™

This is an area I see many people make mistakes in because they don’t realize that even if their divorce decree gives a debt to their ex-spouse and makes their ex-spouse accountable for paying it, divorce courts have no jurisdiction over creditors to force them to accept that settlement agreement.

Divorce courts do not have the power to wipe out your obligations to lenders, such as credit card, auto loans, or mortgage companies. If your name is still attached to a debt, then you are still liable for it, even if your spouse has been the one ordered to pay that debt.

Let’s examine the case of Linda and Tom. Linda and I met through a friend at a party after her divorce had been finalized. Unfortunately, the story she shared with me is all too common…

This couple didn’t have a lot of assets or debts and thought that their situation was fairly simple. They used one attorney to draw up the legal papers as the divorce was uncontested.

Here’s how it panned out (numbers have been rounded and adjusted for simplicities sake):

  • Linda

    House
    Mortgage Debt
    ½ Investments

    Her Car
    Her Car Loan

  • $150,000
    ($125,000)
    $50,000

    $10,000
    ($10,000)

  • Joint

    $150,000
    ($125,000)
    $100,000
    $75,000
    $30,000
    ($30,000)
    ($50,000)



  • $50,000
    $75,000
    $20,000
    ($20,000)
    ($50,000)

  • Tom



    ½ Investments
    401k
    His Car
    His Car Loan
    Credit Card Debt


Linda kept the house and the mortgage obligation, ½ their investments, and her car, along with the car loan associated with it. Tom kept his 401k, ½ the investments, his car along with the car loan associated with it and assumed all of the credit card debt.

Well, life happens whether you are married or divorced, and what happened next was a mess.

Within 6 months Tom lost his job and quickly went through his savings. When he couldn’t pay the credit card debts, the late charges and interest began to accrue and to make matters go from bad to worse, the credit card company’s skyrocketed his interest rates from 9.99% to a whopping 27.99% because he now had become more of a credit risk!

Linda meanwhile, had no idea that her credit was going down the tubes as well because her name was still on all those joint credit cards. She hadn’t concerned herself with any of this because he was the one the court had ordered to make the payments and he was receiving the statements.

In the meantime, Linda also began experiencing financial troubles because she soon realized that the house was more than she could afford on her own. This is a common mistake that I see more women make because they may be more emotionally attached to the home. She also went through her savings during this time.

When Linda decided that she would try to refinance to lower her rate and potentially take some of the equity from the home, what she found out was devastating. Because of Tom’s troubles with the still joint credit cards, her credit had also taken a nose dive and she was no longer a candidate for refinancing.

Within a few months, she lost the home to foreclosure, which in turn only made Tom’s situation worse, as his name was still on the mortgage as well.

Unfortunately, now both parties credit find their credit is ruined and sadly it will take them both years to rebuild.

A Better ScenarioHad Linda and I met before her divorce, I would have given her some pre-divorce planning advice that would have made her aware of the dangers of their scenario.

My recommendations might have gone something like this:

  • Linda

    House
    Mortgage Debt
    ½ Net Equity
    ½ Investments
    Her 401k
    Her Car
    Her Car Loan
    ½ Credit Card Debt



  • $12,500
    $50,000
    $37,500
    $10,000
    ($10,000)
    ($25,000)

  • Joint

    $150,000
    ($125,000)

    $100,000
    $75,000
    $30,000
    ($30,000)
    ($50,000)



  • $12,5000
    $50,000
    $37,500
    $20,000
    ($20,000)
    ($25,000)

  • Tom



    ½ Net Equity
    ½ Investments
    401k
    His Car
    His Car Loan
    ½ Credit Card Debt

 

  • Sell the home and split the equity and each buy something smaller and more affordable or rent for a while.
  • Jointly agree to pay off the credit card debts, close those accounts and open new ones in individual names (open individual accounts before closing joint accounts as credit may be easier to obtain that way).
  • Split what’s left and start over with a clean slate!

Same net split, far different outcome! This would have truly severed the financial ties and taken the pressure off both parties to allow them to begin anew with a fresh start.

To find out what problems you may be headed for and how to avoid them sign up for a Divorce Discovery Session now!