Don’t Let Debt Destroy Your Marriage

December 19, 2014

Sometimes when I meet with someone to walk through their finances, I get the distinct impression that our conversation is going to have a significant impact on their life. I had one of those conversations recently with a couple who was very seriously considering separating and divorcing. One of the biggest factors in the stress and tension that is damaging their marriage is how they deal with money or…don’t deal with it. 

She came in for some “pre-separation” guidance and it morphed into a joint counseling session. As she was contemplating separation and divorce, she became very uneasy with what her financial future looked like. She wanted to prepare herself, mentally and financially, for what was about to happen in her personal life.

The prospect of not receiving child support or alimony (she didn’t trust her soon-to-be-ex or the court system) while losing the 2nd income in the household made her very afraid of what her financial future looked like. What made her situation unmanageable in her mind though wasn’t just the cash flow that would be changing. It was the level of debt that they had accumulated during the marriage without any real strategy about how to pay it down.

She said that financial stress was a major factor in the breakdown of the marriage. She was relatively debt averse, but her husband was a “gadget guy” and was always buying the latest and greatest technological toy. She enjoyed fine dining and they didn’t cook at home very often. With her food habits and his technology habits and a consumer driven mentality, they had successfully spent about 105% of their income every year for the prior 10 years and it was all on credit cards that they were having increasing difficulty making even the minimum payments on.

We made a list of all of the debts (excluding the mortgage) that they had accumulated. We looked at the balances, minimum payment requirements and interest rates. There was close to $55,000 in credit card debt with minimum payments in excess of $1,300/month.  That was about the same level of payment as their mortgage and she couldn’t really say what they had to show for that level of debt.

Before moving forward with the separation/divorce, she wanted to know what they should do about the debt, which was all in their joint names. I walked her through a series of options and suggested that her soon-to-be-ex-husband could (since he worked at the same employer) come down to the office where we were meeting and hear the options as well.  That way, they could be on the same page and decide how to move forward.  After he joined us, we walked through these potential ways to proceed:

  • Stop using credit cards! The first rule of getting out of a hole that you’ve dug for yourself is “Put the shovel down!” When you’re no longer digging, you can work on climbing up and out. You can increase your income (part time job, sell assets, etc.) if possible to help with the equation as well.
  • Do it yourself:  Start with the debt that has the highest rate of interest and pay the minimums on everything except that. Pay that debt down aggressively. Throw every dime possible at that debt until it is gone. When it is, move to the next highest rate of interest and repeat that process. It’s a long slow grind but it can and has been done. Call every creditor and ask for a reduction in interest rates and let them know that repayment is becoming problematic. You may see results here, and you may be told no.
  • Work with a non-profit credit counseling service. Many non-profit credit counseling services have arrangements with creditors to immediately reduce your interest rates and make the payments more manageable. You would make one payment to them and they pay the credit card companies. This is typically a 3-5 year plan and you pay back all of the debt, with the primary benefit being that interest costs are greatly reduced and you are forced to stop using credit, which attacks the problem at the core.
  • Debt settlement/debt resolution:  This is an aggressive strategy that has a significantly negative impact on your credit score.  You can do this on your own or find a company that has a good reputation in this part of the business. Companies will settle your debt, often at steep discounts (under $.50 on the dollar in many cases), enabling you to get out of debt much faster than by paying off the full debt.  The negative impact on your credit score is significant. Also, forgiven debt is considered income so you may be faced with paying taxes on the amount of debt that is forgiven. This is a serious step, but it may be the right one if none of the prior solutions work for you.
  • What if debt settlement isn’t the right option? Bankruptcy is the next and final step in how to deal with debt. This is clearly a major financial and life decision. Don’t go into it without knowing the consequences. Sure, your debt may all go away, but on job applications there is often a question “Have you EVER filed bankruptcy?” and if you have a government security clearance, it may impact that as well.  But, in many cases, bankruptcy is the only logical option.  Your debt either goes away in full or you work out a payment plan and are then able to move forward.

After walking them through these options, they decided to start with the credit counseling option. They didn’t have the discipline for the do-it-yourself solution and were afraid of the bankruptcy option. They commented that working together on the debt solution was the first time that they had agreed on anything in years!

Will it save their marriage? I’m not optimistic about that. But now they (and you) know their options and can make the best choice possible to help them reach their longer term goals.