Divorce is one of the more emotionally painful events you'll experience in a lifetime. But the financial implications of a divorce can be just as painful before it's all said and done. According to Divorce Source, a divorce can take between one and two years to become finalized, and the financial consequences--debt and a free-falling credit score--can be drastic and long-lasting for everyone involved.
Credit Cards
Jointly held credit card debt is typically divided in half at the time the divorce is finalized. Other than mortgages, credit card debt is the most common type of marital debt, according to the Equality in Marriage Institute. Credit lines that are opened in both spouses' names are jointly held debt, and are normally split in half at the time of divorce. In most states, however, credit lines opened in one spouse's name become that spouse's sole responsibility.
Mortgage
A housing market crash, such as the one that took place in 2008, can destroy the equity people previously had in their homes and dramatically decrease home values. As was the case after the 2008 crash, this can result in a great many foreclosures and short sales.
Foreclosures and short sales damage credit ratings for years and leave people owing lots of money to banks and mortgage companies, which makes moving on very difficult, according to Divorce Source.
Who Owes What
If you controlled the finances during the marriage, then you probably have a pretty good idea of what debts you accumulated, and approximately what you're going to owe after the divorce is finalized. If your spouse controlled the finances, you'll have to find out what debts you and your spouse have. The easiest way to find that information is to get a copy of your credit report. Shared credit that you may not know about will show up on the credit report.
According to Divorce Info, debt allocation will depend on the laws of your state, but normally the courts try to divide debt as evenly as possible. Some, but not all, states account for income disparity between the spouses when dividing debt. Once responsibility for the debt has been allocated, you can decide how you want to take care of the debt. This can be made part of the final divorce decree, making it legally binding.
Bankruptcy
Some people become so inundated with debt after a divorce, they must file for bankruptcy because they are unable to pay back their debts. According to Forbes, divorce and bankruptcy "commonly intersect," with divorce being a top three reason for all bankruptcy filings in the United States every year. If you think you're unable to pay your court-ordered debts, you should talk with an attorney who specializes in bankruptcies.
Should your ex file for bankruptcy or just refuse to pay jointly held debts, your creditors can come after you for the full amount of the debt, including interest and penalties.
Considerations
Marital debt and debt incurred after a separation, such as lawyer fees and moving costs, can be overwhelming, especially if the economy is in a rut. When the economy is good, it's easier to pay off marital debt because marital property, in all likelihood, has more value and can net more cash at the time of divorce. A bad economy can actually increase your debt due to devalued homes, job loss and eroding pension plans, for example.
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