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Episode 78 Transcript: Organizing Your Finances - Debts

In this episode, which is the final in our four-part series on organizing your financial information, I want to talk to you about organizing information about your debts.

First, let me speak to why do we need this information to begin with? Well, as with many things related to your debts, it’s very similar to why we need the information related to your assets. Ultimately, in your divorce, you are going to be dividing your assets and your debts between you and your spouse. In order to do that, we need to know what debts exist and we need to know a series of details about them. Let’s talk about what those are. Let me first start off by listing some of the most common types of debts. Hopefully, this will assist in your thinking about what debts you may have outstanding that you should list as part of your financial disclosure in the divorce process.

Probably the most common type of debt that I see clients have is credit card debt. By that, I don’t mean that you right now today owe money to your credit card company, but you pay your credit card off in full every month. I would ignore that type of credit card debt entirely. Technically, it’s a debt, but if you pay your credit card balance in full every month, I would not think of yourself as having any credit card debt. I’m talking about credit card debt that you carry month to month that is not paid off in full each month. That’s the most common type of debt I see people carry. It’s also often one of the most expensive types of debt you can have in terms of the interest rate that your credit card company is charging you for the luxury of being able to carry that debt month to month.

Probably the second most common type of debt that I see is debt on real property. That’s almost always a mortgage and/or it can be, in addition to that or on its own, a home equity line of credit. That’s a line of credit offered to you by your bank, secured by the value of your home. Because it is secured by the value of your home and thus less risky to your creditor, the rates on a home equity line of credit are often far more favorable than the rates on, for instance, credit card debt, if you have that. Many people will have a home equity line of credit because they used it to pay off credit card debt. That may be your situation, or it may not be, but it’s a very common type of debt to have.

Another really common type of debt to have is student loan debt. I’ll talk a little bit more about the different details we want to know about each type of debt that you have. For student loan debt, it’s important to clarify when that was incurred. Was that something that was incurred a very long time ago, that was incurred recently? But we’ll talk more about that in a bit.

Another really common type of debt that sometimes is formally documented and sometimes not is a personal loan. Maybe your parents or your spouse’s parents or a sibling loaned you and/or you and your spouse together money during the course of the marriage, and they expect that money to be repaid. It was not a gift. They may or may not have documented that formally. We’ll talk about that more in a second. That’s another common type of loan. Often, the repayment terms are more favorable than you might get from a commercial lender because it’s someone you have a personal relationship with. Whether or not that loan was documented formally in writing, it’s definitely something you want to, at a minimum, identify when you’re identifying the different debts that you have in the divorce process.

Other types of loans against other types of assets can be common, meaning not against your home (I’ve spoken about those already) but against, for instance, a retirement account or a life insurance policy or another kind of asset that lets you borrow against it. You may have a loan or a lien against that asset for money that you used for a variety of potential purposes, either during the marriage or before the marriage, and you absolutely want to list those. Ideally, when you’re listing your assets, as we talked about in the previous episode, you want to flag as you list that particular asset that has a loan or a lien against it. You want to flag that there is debt against this asset, that the value of the asset needs to be discounted for the debt against it.

Finally, many people will have tax debt maybe from a year when they had an unexpected tax liability that they didn’t have the liquidity at the time to pay or because they didn’t file in a timely way and they’ve had liabilities plus sometimes interest and penalties that have been building up that are now owed. That’s another common type of debt.

Let’s talk now about what are the kinds of details and information points that you want to try to gather about each of these different types of debts?

First of all, you want to clarify what type of debt is this? Is it credit card? Is it a tax liability owing? Is it a personal loan? Is it a mortgage? Clarify that. Then secondarily, you want to clarify in whose name is this debt held? Is it in your name alone? Is it in your name jointly with your spouse or jointly or collectively with third parties? Is it in your spouse’s name alone but you’re aware of the debt, and you want to identify it? By whom is the debt held? Is it by a commercial lender, a bank, for instance? Is it to the United States Treasury because it’s a tax debt or a federal tax debt? Is it to your student loan lender? Who holds the debt? What entity?

Then you want to specify, if you know it, and you may not, whether you can transfer the debt. I’ll say that debts are much more difficult to transfer from one person to another than an asset is. That has to do with the fact that you’re often, especially a commercial lender or creditor, in order to loan to you, you went through some sort of application process, and they approved you as somebody who could hold the debt, and they’re not quick to be willing to just transfer the debt to some other person whom they didn’t approve. If you know it or if you can find out, it’s good to know whether there’s a possibility of transferring the debt, if that’s something that you and your spouse anticipate doing or would like to do as part of your negotiation.

Then you want to clarify, when was the debt incurred? Was it incurred in one moment, or was it something that was increased over time? For instance, a mortgage is generally incurred in one moment, at the time that you are acquiring your home or maybe going through a refinance of a prior mortgage. Whereas a home equity line of credit might be something that was incurred, and you drew down against and then you repaid and then you drew down against again. To the extent you know, when did you incur the debt and in what amount? Do you recall? Do you have records of it? What was the original amount of the debt incurred, and what was it for? If it’s a tax debt, is it for back taxes owing? For what year? State taxes? City taxes? Federal taxes? You want to include all the details you know. Student loans. That is obviously for your education, but for what? Was it for a bachelor’s, a master’s degree? When were you in school? Was that during the marriage? Prior to the marriage? It’s also helpful that you don’t need to indicate it, but it’s a relevant point whether or not the degree that these student loans are tied to is something that you’re using in your work today that’s integral to your work and your ability to earn today. Not technically a legal point but just a useful data point. If it’s a personal loan, what was it for?

Sometimes debts can be incurred just to pay ongoing expenses that you otherwise wouldn’t have the income to pay, like a child’s private school tuition, for instance, or just if your family’s total expenses, not necessarily big-ticket items, but your total expenses for a given year or years exceed your income. Well, then you’re either going to be drawing down on assets, or if you don’t have that available to you, you’ll be incurring debts. Maybe personal loans. Maybe credit card debts. Maybe drawing from your home equity line of credit. So, in identifying each debt, to the extent you know, you want to identify what that debt was incurred for.

Then you want to identify and quantify what’s the balance of the debt now. Is it greater than it was? Has it grown over time? Has it been paid off and decreased over time, ideally? Tied to that current balance, what is the recurring cost of the debt? Most debts are paid monthly. What do you owe on the debt? What’s your monthly credit card service? What’s the monthly mortgage amount? If you have a personal loan, what are the repayment terms?

Also related to the repayment terms and just the recurring cost of the debt, what is the interest rate on the debt? So that you can compare, for instance, the expense of maintaining this debt as a credit card debt as opposed to, say, as a personal loan if you have that available to you at a more favorable rate, or as a home equity line of credit at a more favorable rate. Also, is that rate or that monthly debt service fixed or is it likely to change, and in particular, increase in the future? That’s something that’s very important to know as you think about how to distribute responsibility for each of the debts that you have. You want to know what the cost associated with being responsible for that debt is, so that can be built into a person’s budget if they are anticipating taking over the debt.

Just as I said with assets, you want to do the same thing in listing your debts in similar subcategories. List your credit card debts together, student loans together, personal loans, mortgage, home equity line of credit, tax debt, debts against other assets, like against a retirement account or a life insurance policy, so that you’re comparing apples to apples. Then finally, also same with assets, if you don’t know something, it’s okay to indicate that you don’t know. You’re not expected to know everything at the outset of your process. In fact, part of the process is helping you figure out how to fill in the gaps in your knowledge in the information that you have about your finances that is relevant to the ultimate division of your assets and your debts.

I would say one final word about documentation, and this goes for assets as well. What’s useful documentation to provide about a particular debt at the outset of your process, or about a particular asset for that matter? I would say the most recent statement that you have regarding that asset or debt. If you have a statement regarding that asset or debt as of the date of the marriage, meaning it was something that predated the marriage, you want to provide that as well, for sure, if you have access to it. You may not if it’s something from 15 or 20 years ago, or even 10 years ago. Finally, any documents that you have related to the acquisition of the debt or the asset. Any loan documents that you have or any documents related to acquiring the asset when you did acquire it. Those documents can be useful to have because they will often clarify what was the original purchase price of the asset or the original principal balance of the debt, what are the repayment terms, and other valuable pieces of information. To the extent you have access to that information, to a recent statement regarding the debt or the asset, to a statement regarding the debt or the asset, if one exists, as of the date of the marriage, and then any documents related to the acquisition of the asset or the initial incurring of the debt are very useful to have.

That was our episode on organizing your financial information around your debts. I hope it was helpful for you.

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