For richer, for poorer…till debt do us part? Many spouses share all the good news with their better half, but keep the bad news hidden until it all has to come out.
Whether it’s big debts from gambling, credit cards or other loans, spouses need to share information about how their money’s being used.
Spousal Debt Is a Joint Problem
Many people have been unpleasantly surprised to find out that a spouse has a large amount of debt, often due to credit cards or gambling. One or both spouses find themselves filing for bankruptcy, taking out more loans to pay off debt, or just hopelessly struggling to manage it all. Both spouses need to understand all of their finances, and know the risks and duties of debt solution options.
Saving Your Spouse from Debt
Look at this common example, found in the news: A woman sought help from a financial advisor when she learned her husband racked up $68,000 in credit card debt. The woman’s husband wanted them to refinance their home to consolidate their mortgage loans, car loans and his credit card debt.
The advisor counseled the wife: Don’t sign that loan. It’s common for spouses to rush in and do anything to pay off one another’s debts. While it’s a natural response, there are good reasons to say “no” to taking responsibility for your spouse’s out-of-control debt.
Use Caution and Don’t Put Joint Assets at Risk
In this example, the wife would have put the couple’s joint asset, their home, at risk to pay off her husband’s debt. Losing their home if they didn’t pay the new mortgage could be worse than other options for dealing with the credit card debt, including the husband filing for bankruptcy.
Every debt situation is different, and it’s worth the cost and effort to have your situation analyzed by an expert, such as a tax adviser, financial adviser or bankruptcy attorney, before making a final decision.
When one spouse has incurred debt that was truly for his or her own personal expenses, such as clothes, gambling, “toys,” or real estate titled in their name only, the other spouse shouldn’t sign a loan or note to cover the debt. He or she wouldn’t be accountable for it in the first place.
However, once a spouse signs a note or loan, it’s harder to show that a debt is “individual” and is the responsibility of the spouse who created it. Showing that a debt is individual and not joint can be important whether a couple stays married or gets a divorce.
In many cases, creditors can’t look to someone’s spouse for payment on an individual debt. A spouse’s separate property, and maybe the couple’s joint property, is beyond the creditor’s reach.
In a divorce, it may be easier to convince a court that your spouse should take responsibility for his or her debts if you haven’t agreed to it, as in the refinancing example.
Prenuptial agreements have been around for many years, but often couples avoid even talking about them as a sign of lack of faith in their future. However, a prenuptial agreement makes sense, especially where one spouse has significantly greater income, assets or debts. Nobody can predict the future, and a prenuptial agreement can serve as a safety net for the protection of both spouses.
Don’t leave the important details of a pre-nup to chance. Seek the advice of an attorney and review your situation and your options. If you decide to go ahead, it’s best if both of you have your own attorneys to ensure the agreement is fair.
A prenuptial agreement can actually help you avoid problems and conflicts over your finances. Your debts are less likely to cause you part ways when you’ve addressed the issues up front, and agreed in advance how you’ll handle them.
Questions for Your Attorney
- My spouse and I didn’t sign a pre-nup. Can we enter one now that we’re already married?
- Can spouses loan one another money? Can you sue your spouse if a loan isn’t repaid?
- Can creditors reach our joint bank accounts for payment of one spouse’s debts? If so, can they try to get the entire account balance?