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Divorce E-Newsletter

Credit and Divorce

Introduction

For the vast majority of divorcing couples the post-divorce financial picture is not very bright. Many couples get into financial disasters during the course of their marriage. Many, in fact, report that their financial situation was the cause of strife between them. The financial outlook may not improve much without some major changes in how they each individually handle money and debt. Many people fail to recognize that their own beliefs, attitudes, and approaches to money and debt are as much a cause for their situation as their ex-spouse's. If handled correctly, post-divorce circumstances can present an opportunity to make the very changes that are needed.

Hypothetical

Pre-Divorce Situation

Before their divorce, Robert (48) and Roberta (47) appeared to be doing well financially. Each had a job paying about $60,000 annually, and supported their two grown children through college. Each drove a late model SUV. Each had an equivalent amount in their 401(k). Their home, which neither wanted to keep, had $50,000 worth of equity. They sold the home and split the equity equally. They had enough furniture from their home to split equally to furnish two upscale two-bedroom apartments.

Robert and Roberta had a little over $100,000 in credit card and other unsecured debt that they also agreed to split equally. They agreed neither would pay spousal support to the other since their health was good, and they had substantially the same income and level of education. Roberta had stayed home for two years when the children were young and returned to work part-time for 5 years until both the children were in school, but as that was long ago it no longer had an effect on her career.

Robert's Post-divorce Situation

Since the divorce, Robert has had an increase in salary and now earns $65,000. He is having difficulty figuring out why money is still so tight. He decided to do the right thing and take part of his share from the sale of the home to pay down part of his credit card and unsecured debt. Some facts:

  • He earns about $65,000 a year

  • He has credit card and unsecured debt of about $38,000

  • He took a 401k loan to help pay his attorney for the divorce and other separation and divorce expenses and still owes approximately $3000 on that loan

  • He still owes approximately $11, 000 on his vehicle which has a current value of $16,000

  • So far, he has never made a late payment on any installment loans

  • He rents an upscale two bedroom apartment
Robert's perceptions of his financial situation

Although my job is stable, and I currently do have a good income, I find that at the end of the month, I am using my charge cards again. After I pay my car loan payment, my 401(k) loan payment, my regular living expenses (rent, utilities, gas, car repairs, car insurance, food, clothing, parking, lunches, gifts for families and friends, entertainment, like cable and internet access, etc.), and the minimums on my credit cards, the money runs out before the month! Luckily, I have never missed a payment, and I still have a high credit score. After I paid down some of my credit card debt, two of my credit card companies even raised my credit limit.

Recently, I read that most credit card companies are going to increase their minimum payments from 2% to 4%. With my current expenses, I will not be able to absorb the increase. I really do not want to have to file for bankruptcy since I have always thought only deadbeats filed for bankruptcy. Besides, I realize that the new bankruptcy law that is going into effect soon may keep me from doing that anyway. I feel as if I just cannot get ahead. I have a constant stomachache, and all I can do is worry about my debts and how to get out from under them. I would really like to be able to get out from under this load of debt, not have any more debt, start building some equity in a home, and start to save more money for my retirement.

Support Group

Because of his dismay over his financial situation, on the suggestion of some good friends, Robert recently joined a financial issues group to see if he could find some answers to some of the questions that have been bothering him. Below are some of the things he learned from the support group.

What about bankruptcy?
  • New Law. Bankruptcy was originally intended to give debtors, who found themselves overwhelmed by debt, a fresh start. Formerly, bankruptcy laws did not consider income, and because Robert's liabilities outweigh his income, Robert would likely be considered bankrupt. Recent changes in the bankruptcy law, however, could make it more difficult for Robert to discharge his debts in bankruptcy. Besides the much more extensive paperwork requirements of the new law, the major change for consumers is that now the law does consider income and it is very likely that, at his level of income, Robert will not be allowed a full discharge of his unsecured debt.

  • Money-related personality patterns. Many debtors find that taking bankruptcy does not end up solving their underlying money issues. Instead, what many people find is that, while bankruptcy does give a measure of relief for a while, over time the same money patterns land them right back in the old situation again-assets outweighed by liabilities and constant money worries.

  • Guilt. Many people with money issues find that thinking about bankruptcy creates a high degree of guilt feelings about being irresponsible.

    • Thus, before making a final decision about bankruptcy, Robert may wish to look into relieving his stress about money and his current cash flow problems in other ways.

  • Other options. Robert may want to consider options other than bankruptcy:

    • Downscale lifestyle - With the facts as given, in order to get out of debt and relieve some of his stress, Robert's group may suggest some of the following:

      • He may wish to find a less expensive apartment for a year or so.

      • Trade cars so that the money going to car payments could go to pay off unsecured debt.

      • Find other ways of cutting expenses such as downsizing from Cable and DSL to the mainstay networks and dial-up internet connection.

      • If his career allows, he could possibly cut some corners in his clothing allowance and his food and entertainment expenses.

      • He may have some belongings he no longer needs that he could sell instead of continuing to Rob Peter to pay Paul.

    • Two major recommendations Robert's group will likely make are:

      • Do not scrimp so much that you feel neglected and short-changed (some call debtors who short-change themselves self-debtors) like people who go on crash diets.

      • Do not continue using your credit cards (debting) for any reason. Some will suggest that Robert destroy all but one credit card, to be used only in emergencies for necessities.

    • Keep a record of ALL monies spent, no matter how small or how large.

    • Using that record, develop a monthly spending plan for getting out and staying out of debt while enjoying an abundant lifestyle based on your needs, your likes and your dislikes.

  • Why do I still have such a high credit score? Robert's group will likely have a few comments about the nature of credit card companies in answer to this question:

    • Like many other consumers, Robert is a credit card company's very favorite customer. He has a relatively high income, carries a large balance, pays only the minimum payment, is never late with a payment, and now and again pays down on the balance, letting the credit card company know that he is not going to leave them in the lurch.

    • To do the right thing Robert often puts the creditors' interests before his own. This is exemplified by his taking his equity in his home to pay against unsecured debt and charging again at the end of the month so that he is never late on a payment or short of a minimum payment.

    • Having a high credit score (a credit score isn't really a credit score at all; it is a debt score, allowing creditors know how far they can risk letting one go into debt.) isn't necessarily a good thing for a consumer trying to get out of debt. Creditors are much more likely to encourage more debting by their customers in Robert's situation. The last thing the credit (debt) card company wants is for their customers to have a zero balance on their cards.

  • How about debt consolidators?

    • Some debt consolidation/debt counselor companies are reputable and are able to negotiate good terms with the credit (debt) card companies for the people they help. However, even when the debt consolidation company is a non-profit organization, they still charge a fee for their services. The fact that many debt-counseling companies are non-profit arms of the credit (debt) card companies themselves should alert consumers to the fact that debt consolidation works as much or more to the creditors' advantage as to the consumer's advantage. Usually consumers with a good handle on their own debt picture can negotiate for themselves with their creditors. The most important thing to remember in negotiations with a creditor: Keep your own needs and interests in the forefront of your mind. Your needs and interests are more important to you and your family than your creditors' interests are.

Conclusion

While many believe that a divorce will help to relieve the stress of their financial situations, they often find that their former spouses did not cause their money problems. Instead, they discover their own deeply held beliefs about money and attitudes towards money result in their own dysfunctional money patterns. Some folks find that joining a money-issues support group can help them find answers to their concerns.

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Credit and Divorce

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