Couples & Money Category
Dear Liz: How long must I be punished for my ex’s poor payment history? In our divorce he agreed to pay the credit cards and other bills. He defaulted and has filed for a Chapter 13 bankruptcy. My credit scores plummeted, and recently one of the cards I obtained on my own to help rebuild my credit has dropped me, stating my credit scores as the reason. Do I have any recourse here?
Answer: Not really. As you’ve discovered, creditors don’t have to pay any attention to divorce decrees that say who’s responsible for paying what. You agreed to pay the bill when you signed up for the card. So if your name is on the account, your credit scores will be hurt if it’s not paid.
That’s why it’s so important for separating couples to separate their credit as well. Jointly held accounts should be closed, and any balances transferred to a card that’s in the responsible party’s name only. Otherwise, missed payments and charge-offs will continue to affect both people’s credit for years.
Dear Liz: I have three credit cards that are in my name only, plus a small loan at my credit union. My husband did not sign for any of these, nor does he know the extent of my debt, which is about $10,000. If I should die before I can get them paid off, will he be responsible for my debt?
Answer: Your debts become an obligation of your estate when you die. That means creditors will be paid out of the assets you leave behind. The extent to which creditors can make a claim on jointly owned assets — such as, say, your home — varies by state. In a community property state such as California, debts are generally considered owed by both people in a marriage, so a jointly owned home would be fair game. In other states, creditors could go after assets co-owned by your husband if the debts were incurred to benefit you both.
That’s not the only reason secret debts are a bad idea. Every day you hide these debts, you’re lying to your spouse about your true financial picture, both as an individual and a couple. Even if you keep your financial accounts strictly separate, you should have a clear idea of each other’s assets and obligations so you can plan your future together.
If you’re keeping mum because you’re worried your spouse will get violent, call the National Domestic Violence Hotline at (800) 799−SAFE (7233) for advice and help.
Otherwise, it’s time to come clean so that the two of you can work out a plan to pay off your debt and prevent you from incurring more.
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Dear Liz: My boyfriend is deployed. I have his power of attorney, and during his deployment I have paid off all of his credit card debt. The accounts now need to be closed because they are ones that were acquired with his former wife. I know you say that it will hurt his credit to close accounts, but I’d rather close them because they’re tied to his ex.
Answer: If the former wife is a joint account holder on the cards, they should have been closed and the balances transferred to other credit cards in his name only before the divorce was final. The credit score dings from closing accounts and opening new ones pale compared with the potential damage a vengeful, or neglectful, former spouse could do with those cards. She could have run up big balances or tried to wrest control of the accounts and then failed to pay them, ruining his credit scores.
If your boyfriend has several other open credit cards, you could simply close these. If he doesn’t, you might talk to the credit card companies about closing these cards and simultaneously opening new ones in his name only. This might be tricky to do while he’s deployed, however, even with a power of attorney. Another option is to simply open a new card for him online before closing the others.
Dear Liz: My soon-to-be ex wants to refinance our mortgage to pay for renovations so we can sell it for more money. He also wants to take out some cash to pay off unsecured loans. (I have $11,000 in credit card debt, and he has over $50,000.) The house recently appraised for $310,000 and we owe $158,000 on it. Is it wise to refinance in this circumstance?
Answer: A cash-out refinance would be a risky maneuver even if you intended to stay married. Renovations rarely boost a home sale price enough to cover their cost. Also, home equity that’s used to pay off credit card bills is often wasted, since the borrower never fixes the problem that led to overspending in the first place and simply runs up more debt. Since he would be getting the bulk of the benefit by having more of his debt paid off, you also would need to adjust the rest of your property settlement.
Often, the best and easiest solution in a divorce is to simply sell the house. You certainly wouldn’t want to remain on a mortgage with an ex after the divorce was final, if you could possibly avoid it. A good divorce attorney can give you advice about how to proceed from here.
Dear Liz: We married late in life and each of us brought separate property to the marriage. One spouse has four children and the other none. We have a marital trust that allows for the spouse upon death to receive the entire estate. Upon the death of both spouses, how would you draft a provision that would allow the remainder of one spouse’s separate property to be allocated to her children and the other spouse’s separate property to be donated to a charitable foundation?
Answer: Instead of allowing each other to inherit everything outright, you might want to consider a bypass trust. These trusts allow the surviving spouse to benefit from the assets during his or her lifetime. Upon the surviving spouse’s death, the assets are bequeathed to the ultimate beneficiaries. The survivor can’t alter the trust to change or prevent that.
Bypass trusts can create family tension, however. If the mother in your example were the first to die, her children would have to wait for “their money” until her spouse died. In the case of much younger or unusually healthy spouses, that can be a long wait, with the kids worrying that the surviving spouse will spend most or all of the money in the meantime.
If that could be an issue in your case, you might consider buying life insurance on the mother, Los Angeles estate planning attorney Burton Mitchell said.
“Some people fund for the children with life insurance on that parent’s life, so that the children don’t have to wait for the second death,” Mitchell said, “and to minimize tension with the children with the surviving spouse.”
You also should consider having a meeting with the children once you’ve decided how to handle this, Mitchell said.
“It is often better for them to understand what is happening and let them ask questions to their parent, before they discover the facts after the funeral,” he said. “At that point, someone is already dead and the survivor’s answers are suspect.”
If your estate is greater than estate tax exemption limits — currently $5.12 million, but scheduled to drop to $1 million in 2013 — you may want to take additional steps to reduce the future tax bite. One option is known as a qualified terminable interest property or QTIP trust. Your estate planning attorney can provide you with details. And yes, you should have an attorney, particularly if you have a large estate or someone may contest the will.
“Anyone can download documents off the Internet or go to a forms service or mill, but to do it right and to minimize problems later, you have to understand each individual’s situation and craft a plan that works best for them,” Burton said. “It’s like snowflakes — estate plans may look similar, but no two should be identical.”
Dear Liz: Is it possible for me to buy a home without having my wife on the mortgage? She lost her business because of the recession. I do not want to deal with her creditors.
Answer: You can apply for a mortgage based solely on your own income, credit scores and debt-to-income ratio, if those are sufficient to buy the house you want. Your wife’s income and credit does not have to be considered.
If you can’t swing the purchase without her income, though, you’ll both need to spend some time improving her credit scores. That might include adding her as an authorized user to your credit cards. Another option is to negotiate settlements with her creditors in return for their deleting the collection accounts from her credit reports. You’d want to be cautious in these negotiations, especially if the statute of limitations on the debts hasn’t expired and your wife could be sued. Consider visiting DebtCollectionAnswers.com for help in negotiating with creditors.
Dear Liz: My husband is planning to retire this summer after 30 years as a teacher. He is 55, I am 56, and I do not plan to retire until I’m 66. He has to choose among several options for his pension: getting the maximum benefit, which ends when he dies; choosing a reduced amount that continues 100% to me when he dies; choosing a less-reduced amount that offers a 50% payment to me when he dies; or a reduced benefit that’s guaranteed to continue a certain number of months if he dies or increases if I die first. We can’t decide what’s best for us. Can you help?
Answer: Not really, but an experienced fee-only financial planner can.
Choosing a pension payout option is tricky, because you’ll be living with the consequences of this decision for the rest of your life. You want to discuss this with a professional who can review your entire financial situation and give you individualized advice. This person should be someone who is committed to putting your interests first, rather than his or her own. You can get referrals to fee-only financial planners from Garrett Planning Network at http://www.garrettplanningnetwork.com.
Dear Liz: I recently got married and have always had a tight grip on my money. Now, I realize, I sometimes may come off as cheap. However, my husband has quite a different view on how and where money should go. As much as I would like to live “college broke” as long as possible (and I could), my husband has the mentality of, “I work hard for my money so I want to see the fruits of my labor.” How can I find a rational middle ground? We have student loans still and he’s planning to return for one more year of graduate education soon.
Answer: Congratulations. Marrying your financial opposite can be challenging, but it also can help you create a more balanced financial life. Savers can learn how to enjoy life today as well as save for tomorrow, while spenders can learn how budgeting and saving actually free them for a richer life overall.
You’re off to a good start by recognizing that your partner’s perspective is different from, but not worse than, your own. Frugal folks sometimes make the mistake of believing their approach to money is the only right way and insisting their spouses have to shape up, rather than recognizing these issues are subject to discussion and compromise.
Start by talking about retirement — when you’d like to quit work, where you’d like to live, what you’d like to do. Playing around with an online retirement calculator can give you both a better idea of the trade-offs you’ll have to make. An early retirement with lots of travel may require a savings rate that’s greater than he (and perhaps even you) would be willing to sustain. Retiring a bit later and spending somewhat less can lower the savings rate to something more comfortable.
Once you find the middle ground, put your plan into practice. Remember that retirement savings needs to come first, even when you have debts and are saving for other goals. Retirement will be expensive, and a delayed start on saving can cost you dearly.
The exercise of creating a retirement savings plan is good practice for every other discussion you’ll have about money. There are always trade-offs involved, and both halves of a couple need to sign off on a money plan for it to work.
It also can help for each of you to have some “no questions asked” spending money, so you don’t have to discuss and compromise over every dollar you spend. Another helpful idea is the “talk to me” limit in which any purchase over a certain dollar amount requires the consent of the other partner. The amount depends on the details of your finances; try $50 to start.