How Can Debt Settlement Help With Divorce Debt?

How Can Debt Settlement Help With Divorce Debt?

Going through a divorce can be an incredibly stressful and challenging time. On top of the emotional toll, there are so many logistical and financial details to sort out. One of the big issues many divorcing couples face is how to divide up debt that was incurred during the marriage.

Dividing debt equitably can be tricky, especially when there are limited assets. And even once the divorce decree specifies who is responsible for what debts, there can still be major problems if one spouse fails to hold up their end of the bargain.

This is where debt settlement services can provide a lifeline for the spouse who gets stuck handling more than their fair share of marital debt. Debt settlement involves negotiating directly with creditors to reduce the overall amount owed. This can be a huge help in making divorce debt more manageable.

The Basics of Dividing Debt in Divorce

Before getting into how debt settlement fits into the divorce debt equation, let’s quickly review some basics on how debt is divided when a marriage ends.

In general, any debts taken on by either spouse during the marriage are considered joint or “marital” debts. It doesn’t matter if the debt is in one spouse’s name only. The key factor is when it was taken on — during the course of the marriage, it is generally deemed a shared responsibility.

Some exceptions include:

• Debts in one spouse’s name that pre-date the marriage
• Debts incurred after separation or filing for divorce
• Student loans used to pay for one spouse’s education

These types of “separate” debts are usually assigned to the spouse who incurred them.

In community property states like California, marital property and marital debt are generally divided 50/50. But even in equitable distribution states, where assets and debts are split more flexibly, the goal is still a fair and equal division.

Dividing up debt involves looking at factors like:

• Each spouse’s income and ability to pay
• Who incurred the debt and what it was used for
• Each spouse’s financial needs going forward

Based on these and other considerations, the court comes up with a division of debts that is intended to be fair. But this doesn’t always work out so neatly in the real world.

When Dividing Debt Goes Awry

Despite the court’s best efforts to equitably divide marital property and debt, things can go wrong in several ways:

• Unequal division – One spouse may be assigned a much larger share of debt due to circumstances like higher earning potential.
• Non-payment – If one ex-spouse simply doesn’t pay their share of joint debts as ordered, the other spouse can get stuck handling the full amount.
• Asset/debt mismatch – Assets and debts don’t always neatly correspond. One spouse could get the house, while the other is supposed to pay the mortgage.

These situations can leave the spouse who ends up with more debt in a terrible bind. Even if the court order clearly assigns certain debts to your ex, you remain jointly liable for them as far as the creditors are concerned. Non-payment by your ex can ruin your credit or lead to collections harassment and lawsuits.

But what options do you have? You can’t force someone to pay a debt if they are unwilling or unable to pay. Let’s look at how debt settlement services can help in these painful scenarios.

How Debt Settlement Works

Debt settlement involves working directly with creditors to negotiate a reduced payoff amount for unsecured debts like credit cards, medical bills, personal loans, etc. The general process looks like this:

1. Stop making payments on the accounts you want to settle (this is key to getting creditors to negotiate).
2. Open a dedicated savings account and start setting aside lump sum amounts.
3. Debt settlement company contacts creditors and negotiates to pay a fraction of the balance (typically 40-60%).
4. Once enough is saved up, the lump sum settlements are paid out of the dedicated account.

This can be a great way to pay off divorce-related debts for less, often with reduced interest rates as well. And it gives you an alternative if your ex just won’t pay those bills.

The Benefits

Here are some of the key benefits of using debt settlement for divorce debt:

• Pay a fraction of balances owed – Settlements typically save 40 to 60% off the original amounts.
• Avoid bankruptcy – Debt settlement is often a better option than bankruptcy if you can afford the settlement payments.
• Prevent collections – Settling stops creditors or collectors from pursuing you further for the reduced balances.
• Improve credit – Once accounts are settled, they are marked “Paid in full for less than the full balance” on your credit reports, which is better than delinquencies.
• Tax benefits – Any forgiven debt from settlements may be tax deductible. Consult with a tax pro.

Key Considerations

While debt settlement can provide major relief from burdensome divorce debts, there are also some key factors to keep in mind:

• Fees – Debt settlement companies typically charge 15% to 25% of the enrolled debt amount. But attorney-based services may charge less.
• Tax implications – Forgiven debt from settlements may be considered taxable income. Understand the rules.
• Credit score impact – Your scores will take an initial hit but then gradually improve as debts are settled.
• Lawsuits – Creditors may sue once you stop paying as part of the process. Legal defense is provided.
• Timing – It can take 2-4 years to complete most debt settlement programs and settle all accounts.

Is Debt Settlement Your Best Option?

Here are some signs debt settlement could provide the right solution for your situation:

• You are assigned most marital debts in an unfair division.
• Your ex refuses to pay their share of joint debts per the divorce decree.
• The debts are unsecured (not tied to an asset like a house).
• You have some funds available to save up for settlements.
• You want to avoid bankruptcy if possible.

On the other hand, debt settlement may not be advisable if:

• You only have limited income and cannot save up for settlements.
• The debts are secured (like a mortgage or auto loan).
• You cannot afford the fees, which are based on total enrolled debt.
• You need to resolve debts much faster than debt settlement allows.

Be sure to consult with a debt relief attorney or advisor to discuss your unique situation.

Finding the Right Debt Settlement Company

The debt settlement industry has historically had some bad actors. So it’s important to find an experienced, reputable company. Here are some tips:

• Work with a licensed attorney-based provider.
• Check credentials and complaints with the Better Business Bureau.
• Read reviews on independent consumer sites like Trustpilot.
• Ask about legal protection and dedicated account management.
• Get fee details in writing. Avoid any upfront fees.

Avoid any company that pressures you to enroll or makes unrealistic promises. And don’t assume debt settlement is your only or best option. Interview several firms and compare.

Other Alternatives to Consider

Depending on your specific situation, some other options to discuss with an advisor include:

• Credit counseling – Nonprofit agencies offer free education and can set up debt management plans.
• Debt consolidation loans – Banks and credit unions may offer debt consolidation loans at lower interest rates.
• Balance transfer cards – Transferring balances to a 0% APR card could provide temporary relief.
• Chapter 7/Chapter 13 bankruptcy – Bankruptcy discharge may still be an option if debt settlement doesn’t work.

The right solution depends on factors like your income, assets, type of debts, credit score, and how quickly you need resolution. Explore all of your options.

Get Empowered and Take Action

Dealing with divorce debt can feel overwhelming and paralyzing. But knowledge is power. Learning about debt settlement and other options allows you to take back control of your financial future.

The first step is simple — have an honest talk with a debt relief professional. Getting professional advice tailored to your unique situation helps you make an informed decision. You can finally move forward with clarity and confidence.

While divorce debt may seem endless, there are solutions. Debt settlement can be a lifeline that helps you finally close this challenging chapter, leaving you healthier financially and ready for a fresh start.

Helpful Resources

• California Courts Self Help Guide – Property and Debts in Divorce
• Nolo – Dividing Marital Debt Upon Divorce
• FTC – Coping with Debt
• National Foundation for Credit Counseling