Handling a Divorce in Tough Economic Times

March 02, 2011 (Press-News.org) Handling a Divorce in Tough Economic Times

The decision to get a divorce is never easy. In the current recession, the decision is even harder to make as spouses look at their debts and wonder how they can make it financially without their partner -- even if the marriage has become intolerable. As the mortgage payments, credit cards and other bills begin to mount, it is important for people to remember that they have options and staying in a broken marriage does not have to be one of them.

Community Property and Debt

One of the biggest issues in any divorce is how to divide the property. Arizona is a community property state. This means that any assets accumulated during the time of marriage are community property and will be divided equitably between the spouses. Even if the property acquired during the marriage is only in one spouse's name, it is presumed to be community property. Certain types of property generally are not considered community property, including any property owned prior to the marriage and any gifts or an inheritance left to only one spouse.

Assets acquired during the marriage are not the only types of community property. Debt incurred during the marriage also is community property. This means that even if the divorce order requires one spouse to pay off a certain debt, the other spouse still remains legally responsible for the debt and the creditor has the right to go after both spouses for repayment of the debt. In some instances, creditors may agree only to go after the spouse named responsible for the debt in the divorce decree, but creditors are not required to do this. Thus, even after the divorce, one spouse has the ability to destroy the other's credit.

The Family Home

Generally in a divorce, the family home is the most valuable asset. In the divorce settlement, one spouse may keep the home, the house may be sold and the proceeds divided between the divorcing couple or the court may come up with another option. But what happens if the house is worth less than is owed or if the mortgage has not been paid in months and the bank is threatening foreclosure?

Some of the options for spouses who find themselves in this difficult situation include:

* They can declare bankruptcy and file for a Chapter 7 or Chapter 13, depending on their financial situation
* They can allow the bank to foreclose on the home and retake possession of it
* They can short-sell the home, in which they make a deal with the lender to sell the house for less than it is worth. The lender then takes all of the proceeds from the sale and the homeowners' loan is marked paid in full.

All of these options will hurt the parties' credit in varying degrees. Bankruptcy generally remains on credit reports for seven years. However, depending on the spouses' other debts, it may be the best option financially. It is worse to have a foreclosure on your credit report than a bankruptcy, even though a foreclosure generally only appears on your credit report for three years. Short-sales also appear on your credit report for three years, usually as a settlement, settlement for less than owed or pre-foreclosure redemption. Short-sales generally do not have as big of a negative impact on your credit as foreclosure.

Each option also has important tax implications for the spouses. For example, a short-sale can result in the spouses owing taxes on the difference between the fair market value of the house and the amount the bank receives for it. The bank may issue a 1099-C form to the IRS, which basically is a loan forgiveness of the amount. But the bank is under no obligation to do so and, under current tax law, any amount of a debt discharge is considered taxable income. So while a short-sell may seem like the best option for a divorcing couple behind on their mortgage, they could end up owing considerable money to the IRS as a result of the sale.

Finding the Legal Help You Need

Anyone considering divorce, with or without significant debt, should speak with an attorney experienced in family law and also one with experience in tax law. It is important to understand all of the consequences any type of debt discharge will have, not only in terms of the divorce, but also in terms of taxes. There is nothing worse than getting a notice from the IRS that you owe taxes on unreported income or are being audited.

A bad economy should not be a reason to stay in a marriage that does not work anymore. Spouses who stay at home or earn less than their counterparts may feel they are at a terrible disadvantage in this economy as unemployment rates climb. But there are options and there are ways to protect you from carrying the entire debt load from the marriage. Speak with an experienced family law attorney about your options today.

Article provided by Law Offices of Scott David Stewart
Visit us at www.sdsfamilylaw.com