Why you shouldn't take out loans before divorce
Written by Michael Juilfs

Why you shouldn’t take out loans before divorce

For some families, taking out a loan or incurring credit card debt is a normal part of the holiday season. Among gifts, food and travel, it can be the most expensive time of the year. But if you’re at a breaking point in your marriage, you might want to think twice before you take on more loans before divorce.

Arizona as a Community Property State

Arizona is a community property state. This means, with a few exceptions, that any property you accumulate during your marriage belongs to you and your spouse equally. This also applies to debt. Whether you’re incurring additional debt to pay for holiday travel, splurging on gifts for the family, or you’re thinking about buying a new car, that debt typically belongs to both of you equally regardless of whose name the debt is in.

While collaborative divorce offers you and your spouse more flexibility in the division of assets and debts than a judge may allow, taking on additional debt before divorce can add complications to your settlement discussions. The timing and reason for the debt can add strain to already tense conversations. In addition to looking at your finances today, a neutral financial professional can work with you to figure out how your settlement will work for you down the road.

Loans Before Divorce: a Lender’s Perspective

You and your spouse may decide that one of you will make payments on an existing debt. Or maybe you’ll determine that each of you will pay for half of that debt. Despite the agreements you make during your collaborative divorce conversations, lenders continue to view debts incurred during the marriage as the responsibility of both parties. As a third party, lenders are not bound by your divorce decree.  If your spouse hasn’t made payments on their share of that debt, the lender may come to you if the account reaches past due status.

If your ex-spouse fails to hold up their end of the deal, you may have the right to go to court to enforce your agreement. In the meantime, whether during your divorce proceedings or after, any missed payments may affect your credit. If your name is on the account, your credit rating will be negatively impacted. Damaged credit can make it much more difficult to rent a house or apartment, obtain a mortgage,  get a job, and cost you more for car insurance. Your spouse’s agreement to pay will not matter to the lender in this case. If a financial institution has a contract with you, they’ll enforce it.

Collaborative Divorce and Financial Neutrals

Collaborative divorce can help make divorce less painful. During the process, you’ll avoid the courtroom, costly litigation, and the unpredictability of a judge’s ruling. In addition to working with attorneys, you’ll have access to financial neutrals and communication specialists. They can help you go through your assets and liabilities and understand the full picture so you can divide the debt in a way that makes sense for you.

However you approach the issue, taking on loans or incurring credit card debt before divorce complicates your financial picture. Before you acquire new debt, take the time to understand how it could impact your situation today and in your newly single future. Work with someone who can help you through the process and give you a better understanding of the decisions ahead. Contact a professional at Best Legal Choices to discuss what happens to your loans in a divorce.