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What Happens to Debt When You Divorce?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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For every two to three new marriages in 2014 there was at least one divorce, according to the latest Centers for Disease Control and Prevention data — a grim statistic that could easily kill deflate your inner romantic.  

Breaking up a marriage is hard to do and it’s made all the more difficult by the financial implications. 

The average price of a divorce, from start to finish, lands at around $15,500 (including $12,800 in attorney’s fees), according to a 2014 survey put out by Nolo, a publisher specializing in legal issues. If the legal expenses are one side of the coin, figuring out what to do with your joint financial assets and debts is the other.  

We’ve talked about what happens to debt after you’ve married. Now it’s time to ask what happens to debt when you divorce. 

Here’s everything you need to know, plus some tips for protecting your finances when a marriage ends. 

Where you get divorced 

When it comes to splitting up debts, the state you live in can sway the outcome in a big way. A majority are considered equitable distribution states, where the judge uses his or her discretion to divide up debt in a way that’s deemed fair and evenhanded. 

Each state has its own set of laws and procedures, but Vikki S. Ziegler, a longtime matrimonial law attorney licensed in multiple states, says the court generally has more leeway in an equitable distribution state.  

Simply put, the judge has the freedom to take multiple factors into consideration. This might include everything from one spouse’s income to another’s employment status.  

The situation could play out much differently if you live in a community property state. These states are listed below, and in them, debt is viewed a bit differently. 

  • Alaska* 
  • Arizona 
  • California 
  • Idaho 
  • Louisiana 
  • Nevada 
  • New Mexico 
  • Texas 
  • Washington 
  • Wisconsin 

*Alaska has an optional community property system. 

Community property states typically split all marital debt right down the middle, regardless of who actually accrued the debt. This means that if your spouse racked up hidden balances during the marriage, you’ll likely be on the hook for half. In community property states, the divorce process is typically more cut and dried than subjective. 

“The most important thing for someone leaving a marriage to understand is how the law applies in each state that they are getting divorced in,” Ziegler told MagnifyMoney. “How are you going to allocate debt, and who’s going to be responsible for what?” 

An experienced divorce attorney can help fill in the blanks. 

The type of debt 

The type of debt you have is another biggie. Let’s first zero in on secured debt, like a mortgage or car loan.  

According to John S. Slowiaczek, president of the American Academy of Matrimonial Lawyers, whichever spouse decides to keep certain assets — such as the house or a car — will also assume whatever debt is left over.  

“Debt associated with an asset will ordinarily be allocated to the person acquiring the property,” Slowiaczek tells MagnifyMoney. 

Your mortgage: The loan will likely be the responsibility of both parties equally, unless it’s only in one party’s name. If you both co-borrowed the mortgage, you’ll have to decide who will keep the loan and who will exit if one partner wants the house. One way to get one name off a mortgage loan is to refinance the debt and put the loan under just one person’s name.  

The equity built up in the home usually belongs to each party 50/50 as long as the title is held as joint tenants with right of survivorship or tenants by the entirety; don’t be intimidated by the legal jargon. All this means, essentially, is that you legally own the home together.  

If you decide to sell the house, either the couple or the court will likely compel that process, after which you can divide the proceeds equally after paying off the debt.  

If you’re planning on staying in your home, refinancing your mortgage before you divorce can help ease the financial blow. With divorce being as costly as it is, finding ways to trim your budget can better prepare you for a single-income lifestyle. Refinancing could do just that, lowering your monthly payment and potentially your interest rate, assuming you have good credit.  

A lower bill may also make it financially possible for you to stay in the house, if that’s what you want. Plus, if you apply before splitting, you’re more likely to get approved since a combined income will likely make you more attractive to lenders.  

Your car loan: The same usually goes for car loans — if one spouse wants to keep the vehicle, he or she could refinance the loan under his/her own name. Or you can sell altogether and divvy up the cash. As Slowiaczek mentioned above, remaining debt follows the asset, so whoever keeps the car will assume the debt. 

Credit debt. The way nonsecured debts, like credit cards, are handled goes back to individual state laws.  

In a community property state, Ziegler says the courts usually take a 50/50 view of marital debt. But equitable distribution states typically look at who contributed to the debt, how much money each party makes, and other statutory requirements that allow them to potentially allocate the debt differently. In other words, things aren’t as black and white, and the courts have more interpretive wiggle room.  

Barbara, a 36-year-old sales professional in Tampa, Fla. is eight months into the divorce process. Florida is an equitable distribution state, meaning the debt she and her husband accrued could end up being split any number of ways. One of the toughest parts of her experience has been the $35,000 of credit card debt she says she shares with her ex. 

“It was mostly accrued by [my husband], but mostly in my name,” she told MagnifyMoney. The couple also have a $202,000 mortgage, and deciding who will assume the mortgage (and the equity in the home that comes with it) has been a point of contention.  

Ziegler says Barbara probably has more leverage than if she lived in a community property state.  

Student loans. Generally speaking, Ziegler says the court is required to look at the purpose of the degree each spouse pursued to determine whether it’s marital or non-marital debt. Again, it really depends on the nature of the debt, who benefitted from it, and what state you live in, among other things.  

For example, a student loan may be in your spouse’s name, but who’s making the payments? And which one of you is the primary earner? These things matter and could potentially play into your divorce agreement. 

When you acquired the debt 

One bit of good news: no matter where you live, Ziegler says premarital debts are off limits. Where divorce is concerned, the court is only interested in debts that were accrued during the marriage. The same generally goes for debt acquired post-separation.  

How the debt was used 

Every case is different, but the reason behind the debt can sometimes be argued. If, for example, debt was taken on for one spouse’s personal use, the other spouse might argue against being on the hook for it, depending on the property laws in the relevant state. 

“Credit card purchases to buy groceries or make a car payment are obviously marital, but what about debt that was racked up for personal use, like [cosmetic surgery] or gifts for someone your spouse was having an affair with?” asked Ziegler. “It can be argued that those expenses are not marital debt and should be assumed by the individual.”  

This underscores the importance of parsing out individual versus marital debts. To help make it easier, Ziegler recommends that couples maintain two different types of accounts: joint for marital expenses, and individual for personal spending. It’s also wise to keep your statements handy.
 

How to financially protect yourself during a divorce 

Divorces don’t usually come cheap, but there are steps you can take to soften the blow. 

Sign a prenup

Prenuptial agreements aren’t as taboo as they once were. According to a survey released by the American Academy of Matrimonial Lawyers (AAML) in 2013, “prenups” are on the rise; a whopping 63 percent of divorce attorneys cited an increase in recent years. This is because they serve as a loophole against state rules, dramatically simplifying the fight over debts and assets. 

“Most prenuptial agreements say that if the debt is in either party’s name, it’s separate debt that cannot be allocated or redistributed for payment,” said Ziegler.  

If you’re already married, it isn’t too late to protect yourself. As of 2015, 50 percent of AAML members reported an uptick in postnuptial agreement requests. 

Safeguard your credit

Take steps to safeguard your credit before you divorce. As soon as you begin the separation process, do yourself a favor and make a list of all your individual and joint debts to get an idea of what you’re dealing with. Are you or your spouse listed as authorized users on any accounts? If so, cancel those straight away to avoid accruing any new joint debt. To make sure you don’t miss anything, pull your credit report and take a thorough look at your open accounts. 

Ziegler also suggests making it clear in the divorce agreement who’s responsible for which debts — but that doesn’t always protect you. 

“The reality is, if your name is still attached to the account, and your ex-spouse defaults on payments, it’s going to negatively impact your credit,” she warned.  

If your ex agrees to pay off any debts, you can protect yourself by transferring the balances fully into the former partner’s name. 

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marianne Hayes
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Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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How to File Taxes as an Immigrant

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Two recurring themes have dominated the news cycle over the past few years: immigration and taxes. While these may seem like entirely separate issues at first glance, immigrants do pay federal income taxes — and face a variety of unique challenges in the process, including dealing with language barriers and learning to file for the first time.

To help make filing your taxes as an immigrant a little easier, here’s an overview of who needs to file, how to file for the first time and where you can turn for help.

Who files taxes?

Citizens aren’t the only ones who pay taxes in the U.S. Immigrants who are authorized to work in this country are required to pay the same federal and state income taxes that citizens do, and undocumented immigrants pay billions of dollars in taxes each year — often for public benefit programs that they are unable to use.

Filing requirements depend on whether you are considered a nonresident alien or a resident alien.

Resident aliens

A resident alien must meet one of two tests:

  • Green card test. The U.S. Citizenship and Immigration Services issued you an alien registration card, also known as a “green card,” which allows you to permanently live in the U.S. as an immigrant.
  • Substantial presence test. You must be physically present in the U.S. for at least:
    • 31 days during the current year, and
    • 183 days during the three-year period that includes the current year and the two years immediately before that. (You can read more about how days of presence are determined here.)

Resident aliens follow the same filing requirements as U.S. citizens.

Nonresident aliens

If you are not a U.S. citizen and don’t meet either of the tests to be considered a resident alien, you are considered a nonresident alien.

As a nonresident alien, you must file a tax return if you own a business in the U.S. or have U.S. income and did not have enough tax withheld by your employer. You may also want to file an income tax return to receive a refund of tax withheld.

What’s a W-4?

If you work in the U.S., your employer should ask you to complete Form W-4, which is used to determine the correct amount of tax to withhold from your pay.

Form W-4 includes worksheets to help you determine how many “allowances” you should claim. Each allowance reduces the amount held from your paycheck. You get one allowance for yourself, one for your spouse, and one for each dependent you claim on your tax return.

You can complete a new Form W-4 at any time, and it’s a good idea to submit a new one to your employer anytime your tax situation changes, such as if you get married or divorced or have a new baby. Adjusting your withholding can help prevent having too much or too little tax withheld.

Rather than relying on the worksheets included with Form W-4, you may want to use the IRS’s Withholding Calculator.

How to pay U.S. taxes

In some countries, the government withholds tax from your paycheck, and that’s the end of your tax filing requirements. In the U.S., it’s more complicated. Here’s an overview of what you’ll need to file a tax return.

SSN or ITIN

To pay taxes in the U.S., you will either need a Social Security number (SSN) or an individual taxpayer identification number (ITIN).

Noncitizens authorized to work in the U.S. by the Department of Homeland Security can apply for a Social Security number in their home country before coming to the U.S. or by visiting a Social Security office in person. You will need to complete Form SS-5, Application for a Social Security Card, and provide documentation to prove your identity, work-authorized immigration status and age. You can learn more about the acceptable documentation here.

If you are not eligible for an SSN, you can apply for an ITIN by filling out Form W-7, Application for IRS Individual Taxpayer Identification Number and submitting it to the IRS along with documentation proving your identity and foreign status. The Instructions for Form W-7 include a list of acceptable documents and instructions for submitting your application.

Which tax forms to file

The tax forms you’ll use to file your tax return depend on whether you are a resident alien or a nonresident alien.

Resident aliens use the same tax form as citizens: Form 1040, U.S. Individual Income Tax Return. Generally, Form 1040 is due on April 15 of the following year. However, if you are living and working outside of the U.S. on April 15, you are given an automatic extension to June 15. You can request a longer extension, until Oct. 15, by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

Nonresident aliens file using Form 1040-NR, U.S. Nonresident Alien Income Tax Return. Form 1040-NR is also due on April 15 of the following year, but taxpayers who are not living and working in the U.S. on that date have until June 15 to file. You can request an extension to October 15 by submitting Form 4868 by the due date of your return.

Reporting income earned outside the US

Many resident aliens and nonresident aliens continue to receive income from outside of the U.S. even after they begin working in the country. Resident aliens are required to report income from all sources within and outside of the U.S. on their tax returns, whether they are living in the U.S. or abroad.

However, you may qualify to exclude a portion of your foreign earnings from your taxable income — the amount you can exclude changes each year. You can determine your eligibility and the exclusion amount using Form 2555, Foreign Earned Income. You can also use the IRS’s Interactive Tax Assistant Tool to help determine whether the income you earned in a foreign country can be excluded.

What to do if you’re undocumented?

According to the Pew Research Center, there were roughly 10.5 million undocumented immigrants in the U.S in 2017, and 7.6 million of them are a part of the U.S. workforce.

Whether undocumented immigrants work legally under Deferred Action for Childhood Arrivals (DACA) protections or work illegally with falsified or nonexistent documentation, they are required to pay taxes on any income earned in the U.S.

Many undocumented immigrants face barriers to complying with U.S. tax laws due to language barriers, difficulty understanding complex tax laws or fears that the IRS will pass their information along to immigration enforcement.

Later, this article will cover resources where immigrants can find help with tax filing. As for immigration enforcement fears, you generally do not have to fear that the IRS will share your application for an ITIN or tax information with immigration enforcement officials. The IRS is not allowed to release taxpayer information to other government agencies, except for providing information to the Treasury Department for tax compliance investigations or under a court order related to a non-tax criminal investigation.

Benefits of paying taxes

Filing a tax return and paying taxes to the U.S. does not entitle nonresident aliens or undocumented workers to claim Social Security benefits, but there are other benefits to filing tax returns. According to the National Immigration Law Center, paying taxes:

  • Demonstrates compliance with federal tax laws
  • Gives immigrants who want to legalize their immigration status and become a citizen an opportunity to prove they have “good moral character”
  • Document work history and physical presence in the U.S.
  • Claim certain tax benefits, such as the Child Tax Credit
  • Claim insurance premium tax credits for children who are U.S. citizens

Where to find help

The IRS’s Volunteer Income Tax Assistance (VITA) program helps taxpayers who cannot afford traditional tax preparation service, need translation assistance or need help applying for an ITIN. The IRS trains and certifies volunteers to provide free basic tax return assistance to individuals.

You can locate a VITA site by visiting http://irs.treasury.gov/freetaxprep/ and entering your ZIP code. Before visiting a VITA site, you may want to review Publication 3676-B (available in English and Spanish) to verify the services provided by VITA and check out the IRS’s What to Bring page to ensure you have all of the required documents and information volunteers will need to help prepare your return and apply for an ITIN, if necessary.

If you prefer to handle tax filing on your own, check out our recommendations for tax filing software.

The bottom line

Working through the forms required to apply for an ITIN and prepare a tax return can be daunting, but seeking help and overcoming the barriers to complying with U.S. tax law is important. If you plan to seek citizenship down the road or someday appear in front of an immigration judge, the fact that you’ve dutifully filed income tax returns while you lived and worked in the country can help make a stronger case for you to remain in the country.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Janet Berry-Johnson
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Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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Financial Therapy: What It Is and How to Know if You Need It

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Whether you’re stressing over paying bills or spending money to make yourself feel better, anxiety and money often go hand in hand. Still, financial advice tends to emphasize numbers and strategies, not the root cause of money concerns.

Financial therapy is a holistic process that enlists both therapeutic and financial methods to help you transform your relationship with money. Here’s how to tell whether or not it might be the right move for you.

What is financial therapy?

The Financial Therapy Association was born out of the 2008 financial crisis, which left many Americans feeling totally hopeless and out of control with their money — a kind of trauma that went deeper than traditional financial counseling could heal. Researchers and practitioners from both the mental health and business fields teamed up shortly after the crash to create a unique, new practice that combines the best aspects of both disciplines.

By late 2009, the Financial Therapy Association, or FTA, was officially recognized as a nonprofit corporation, and the group held its first annual conference in September of 2010. Today, the association offers a variety of tools for both consumers and professionals looking to participate in this unique practice, and also offers a searchable database for finding financial therapists by state.

The association defines financial therapy as “a process informed by both therapeutic and financial competencies that helps people think, feel and behave differently with money to improve overall wellbeing through evidence-based practices and interventions.”

In short, just like regular therapy, it helps you get your head on straight — except in this case, it’s particularly concerned with financial matters. Many financial therapists are also licensed family or marriage counselors, so you can take it on solo or with a partner.

5 signs you need a financial therapist

So, how can you tell if financial therapy is right for you?

Chances are, almost anyone could benefit from professional coaching… but if these scenarios sound familiar, you might want to take finding professional help more seriously.

1. Your relationships are strained, and money’s always the reason. If you’re constantly fighting with your spouse (or other relatives or family members) about money matters, a financial therapist can help you find productive ways to navigate your relationships.

2. You’re depressed or anxious about your money in a way that’s impacting your wellbeing. While money can be a stressful topic for anyone from time to time, if it’s ruling your life, a therapist can help you find new behavioral patterns. Whether it’s the emotional toll of debt or the stress of saving a workable nest egg, a financial therapist can offer both mental and monetary tactics to help you tackle the problem.

3. You know the steps you need to take, but can’t quite seem to make them happen. Whether it’s balancing your budget or paying down debt, if you can’t make your behavior match your financial plan, a financial therapist could have the answer.

4. You find yourself lying about money and hiding your excessive or emotional spending. These kinds of behaviors can wreak havoc on your wallet, not to mention your relationships, and may be based in compulsion. A financial therapist can help you develop alternative relaxation tactics so you can overcome your emotional splurges without doing damage to your nest egg.

5. Thinking about your financial future is leading to unexpected emotions or creating family tension. As important as estate planning may be, it can also be a difficult and emotional experience. After all, it means thinking seriously about the reality of your own death. And divvying up your stuff can lead to difficult conversations, particularly if you have a blended family or strained relationships. A financial therapist can help you work through all that emotional baggage and offer helpful communication tactics.

Do you need a financial therapist and a financial advisor?

There’s no specific set of certifications or degrees a professional must have to be a member of the Financial Therapy Association — so each individual counselor is just that: an individual. He or she may lean more heavily toward one side of the professional aisle or the other, and finding the right fit could take some trial and error.

For instance, if you’re mostly concerned with the how-to part of financial advisement, like figuring out the difference between a Roth IRA and a traditional IRA or the best way to tackle credit card debt, a plain-old financial advisor can probably help you, but so could a financial therapist who works primarily as an advisor or wealth management professional.

On the other hand, if you’re really digging into the emotional side of your financial landscape, finding a financial therapist who is a mental health professional first can help you tackle those struggles, while also laying the framework for solid monetary planning and behavior down the line. A financial therapist who identifies more strongly with the clinical counselling part of their job title may also be able to help you in other aspects of your mental health, if you’re struggling with matters beyond your money.

The bottom line is, there’s no one approach that’s right for everyone — and, just like dating, you’ll definitely want to shop around. Whether you hire a financial therapist, a financial advisor or both, when you’re talking about people who are going to advise you on matters as important as your financial future, getting along well is key. It’s worth making several calls and sitting through a few introductory interviews to make sure you’ve found a good fit.

How to find a financial therapist

If financial therapy sounds like it might be a fit for you, there are some wonderful resources available from the Financial Therapy Association to help you find and hire a professional. For instance, it offers a great database of financial therapists that’s searchable by both name and state.

Of course, since it’s such a new field, financial therapists are relatively few and far between — and you may find there’s not one in your area. Several states on the list have zero names listed beneath them (so far, anyway).

Fortunately, the internet makes it possible to do financial therapy work at a distance, and many professionals do just that. If you find someone whose credentials, focus and basic methodologies you like, you can reach out to them directly to see if they’d be able to perform therapy via Skype or phone call. You can also check out the specific “at a distance” list available via the FTA database. The association also offers monthly online webinars and other educational tools to start the process on your own if you’re not quite ready to hire a professional.

The bottom line

Financial therapy can be a great way to help alleviate your anxieties and fears about financial matters, or to help you find ways to break money-related habits you just can’t seem to knock out on your own. And as with any type of therapy, seeking out professional help is anything but a sign of weakness. Money touches all of our lives and has a huge impact on our lifestyles, so it makes sense that it’s a wildly emotional topic. So if financial therapy sounds like it might be a fit for you, don’t be afraid or ashamed to reach out. If anything, recognizing you need help makes you that much stronger — and both your brain and your bank account will thank you for it.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Cattanach
Jamie Cattanach |

Jamie Cattanach is a writer at MagnifyMoney. You can email Jamie here