Divorce is probably one of the most challenging life altering events anyone can experience. With the emotional toll it takes on your well-being, going through a divorce often comes with financial stress, especially when debt is involved.
Understanding how debt is handled during a divorce will ensure that both parties involved are treated fairly and do not end up being financially ruined.
In our latest Debt Rescue blog, we will explain how your debt will be divided, the impact it can have on your credit score, and how debt review (debt counselling) can assist you to regain financial stability during this turbulent time.
Who is responsible for the debt incurred during the marriage?
The manner in which assets and debts are divided in a divorce depends on one of the three marital systems, unless a prenuptial agreement (ANC) states otherwise.
1. In Community of Property
If you are married in community of property, all your assets and debts are considered to be part of a joint estate.
- What this means is that both of you are equally responsible for any debt that you incurred during your marriage. This applies even if only one spouse took out a loan.
- If you are going through a divorce, your debts will be split 50/50 unless a court orders it otherwise.
- Unfortunately, this can be problematic if your spouse was reckless with credit, as both of you will be held responsible to pay off the debt.
2. Marriage Out of Community of Property Without Accrual
If you are married out of community of property without accrual, each of you remain responsible for your own debts.
- What this means is that any loans, credit card balances, or accounts will only be payable by the spouse who originally incurred the debt.
- Each spouse’s estate is a separate entity, this includes all debts and assets and will remain separate even in the event of a divorce.
3. Marriage Out of Community of Property With Accrual
If you are married out of community of property with accrual, the marriage begins with separate estates. The growth ( the increase of value of each estate) during the marriage will be shared upon divorce.
- The spouse who gained more financially during the marriage may need to share a portion of their wealth with the other spouse.
- However, this does not affect debt. Any debt incurred will remain the responsibility of the spouse who applied for the credit, unless both names are listed on the credit agreement.
How Debt Affects Your Credit Score After Divorce
If you are going through a divorce this will not have an impact on your credit score, but shared debt obligations can have an effect on your credit score.
Joint Accounts: You and your spouse are both responsible for the repayment of this debt (credit cards, home loans, or personal loans) even after divorce. If, for example, your ex-spouse fails to pay their portion, it will have a negative effect on your credit score.
Signed Surety: If you have signed surety on your ex-spouse’s loan, you will remain liable for this debt. Even if the divorce court might assign responsibility to your ex-spouse, it doesn’t absolve you of your responsibility with the creditor. If the debt goes unpaid, your credit score will be affected, and you could face legal action from the lender.
Legal Action: Any unpaid debts may lead to legal judgments, which can result in blacklisting and severe financial consequences.
How to Protect Yourself Financially Before and After Divorce
- Sign an Antenuptial Contract (ANC): This keeps your debt separate, reducing any share liabilities for debt unless you co-signed.
- Close your Joint Accounts: Make sure that all your joint credit cards, store accounts, loans are either settled or transferred.
- Review your Credit Report: Make sure that no unexpected debts are linked to your name.
- Consider Debt Review: If you are struggling with debt post-divorce, debt review can assist you in regaining control over your debt.
Can Debt Review Assist Post-Divorce?
Yes, it can! Debt Review is a legal process which is governed by the National Credit Act. It is specifically designed to help over-indebted consumers to restructure their debt repayments. This is done through a registered debt counsellor who will formally negotiate with your creditors. Debt Review can be a critical resource for spouses experiencing financial difficulties after their divorce.
Here is how Debt Review can assist you:
- Reduced Monthly Debt Repayments
A registered debt counsellor will prepare an affordable monthly debt repayment plan, based on your current financial circumstances. This will include accommodating your living expenses and any legal maintenance obligations you might have.
- Protection from Legal Action
Once you have been placed under debt review, all your listed creditors will be prohibited from taking any legal action against you.
- Your Assets are Protected
Your home loan or vehicle finance can be included in the debt review process. This safeguards your assets from repossession.
How does Joint Debt work under Debt Review?
Before or during your divorce it is important to seek legal and financial advice to identify and separate joint debt wherever this is possible.
If you and your former spouse are jointly liable for a debt, both parties must agree to enter into debt review, for that specific debt to be included.
Let us Help you
For professional, confidential advice tailored to your unique circumstances, contact Debt Rescue today. We understand that life throws lemons and curve balls at us, and this sometimes includes divorce. Whatever you are going through, let us help you.
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