Part 6: Post-Divorce Financial Obligations
What Financial Obligations Exist After Divorce?
A final divorce judgment does not always completely end the financial responsibilities between spouses. Sometimes, one person will have a continuing obligation to pay a former spouse a monthly sum (spousal support or child support), or a person may be required to keep insurance for the benefit of a former spouse. You may also have credit issues, tax issues, or other financial issues that will be impacted following your divorce. The following sections describe situations where you and your spouse may have continuing financial obligations to one another after divorce.
Spousal Support, a.k.a. Alimony
WHAT IS SPOUSAL SUPPORT?
“Spousal support,” also called “alimony,” is money paid by one spouse to the other for a certain period of time (or in some cases, indefinitely). Spousal support can be ordered in monthly installments, in a lump sum, or in a combination.
WHEN IS SPOUSAL SUPPORT AWARDED?
Spousal support is awarded only in certain divorces. A significant disparity in incomes is usually a prerequisite to any award of spousal support. Either spouse may be ordered to pay spousal support to the other spouse. A spouse need not be unemployed to receive spousal support.
In deciding spousal support, the court may consider the length of your marriage, your relative earning capacities, your age and health, your child support responsibilities, your marital standard of living, potential tax consequences of the spousal support award, and any other factors the court deems just and equitable.
Indefinite spousal support will likely only be awarded if your marriage lasted for twenty years or more or if the spouse receiving spousal support has significant health problems that impair their ability to work. The amount of spousal support must be “just and equitable” under the totality of the circumstances, which leaves the judge considerable discretion. It can be difficult to predict a judge’s spousal support award, so this is often mediated or agreed upon between the parties.
WHAT KINDS OF SPOUSAL SUPPORT EXIST?
In Oregon, there are three types of spousal support: transitional, compensatory, and maintenance.
- TRANSITIONAL SPOUSAL SUPPORT allows one spouse to obtain necessary education or job training to reenter the job market after divorce. This type of support is usually paid for a limited, fixed period of time, such as four years to finish college.
- COMPENSATORY SPOUSAL SUPPORT reimburses one spouse for contributing (financially or otherwise) to the other spouse’s education or career.
- MAINTENANCE SPOUSAL SUPPORT is sometimes awarded in long-term marriages, where one spouse earns higher income, and the other person’s standard of living would otherwise greatly decrease after divorce. Maintenance tends to be longer-term then the other types of support, and can even be indefinite.
WILL I STILL GET SPOUSAL SUPPORT IF MY SPOUSE DIES?
No. As with child support, the court may order the spouse who pays spousal support to carry life insurance (with the other spouse designated as the beneficiary) to guarantee future payments.
CAN I GET A CHANGE IN SPOUSAL SUPPORT?
A spousal support order can be modified, but only where the court finds there has been a “significant, unanticipated change in circumstances.” Spousal support can only be awarded at the time of divorce. If a court did not award spousal support in the divorce, then it cannot later modify the divorce judgment to award spousal support.
WHEN DOES SPOUSAL SUPPORT END?
It depends on the length of your marriage and other factors in your case. An experienced family law attorney can give you an estimate of how long spousal support may be awarded in your case. In certain cases, if the spouse receiving spousal support does not make reasonable efforts to become self-supporting within ten years, the paying party may request a court order terminating the spousal support.
If you are on your spouse’s health insurance plan as a dependent, once your divorce is finalized, you are no longer eligible for dependent coverage. Under federal law, you are entitled to continue health insurance coverage under COBRA for up to 36 months after your divorce is finalized. However, your plan will be changed from “family” to “individual” and your rate may increase. Because COBRA benefits are intended to be temporary, you should begin researching new health care alternatives right away.
CAN THE DIVORCE COURT REQUIRE ONE SPOUSE TO CARRY LIFE INSURANCE?
Yes. The court may order a spouse who pays spousal support to carry life insurance (with the other spouse as beneficiary) to guarantee future support payments. Similarly, the court may order a spouse who pays child support to carry life insurance with the child as beneficiary, the other parent as trustee, and a constructive trust over the insurance proceeds. The policy would be need to be maintained until the spousal/child support obligation is fulfilled. The premiums are usually paid by the person paying support, and the court may consider the cost of premiums when determining the amount of support.
HOW CAN I REMOVE MY SPOUSE AS BENEFICIARY OF MY LIFE INSURANCE?
After divorce, you may choose to divest your spouse of his or her rights as designated beneficiary under your existing life insurance policy. In order to do so, you must be explicit in the divorce judgment that divestment is your intention. If you are not explicit in the judgment and your spouse was beneficiary before your divorce, then your spouse will remain the beneficiary after the divorce is finalized.
Upon your divorce, all provisions in your will regarding your former spouse will be automatically revoked unless your intent is clearly stated otherwise in the will itself. If you wish for your former spouse to remain in your will after your divorce is finalized, you should amend your will to make that intent explicit.
Your will can include your preference for your minor children’s guardian. This provision, however, does not guarantee that a particular person, other than your former spouse, will become your children’s guardian. In that instance, a later probate court would decide the issue.
You may be able to collect retirement benefits on your former spouse’s social security. To qualify,
- Your marriage must have lasted at least ten years. (You may also qualify, despite a shorter marriage, if you are caring for your former spouse’s natural or legally adopted child who is under age 16 or disabled, and who is getting benefits on the record of your former spouse.)
- You must be at least 62 years old, or you must be at least 60 and your former spouse is deceased.
- You must be unmarried. You are not entitled to any of your former spouse’s social security benefits so long as you are remarried. If, however, your second marriage has ended (whether by divorce or death), you are again eligible for your first spouse’s social security benefits.
- Your former spouse must be eligible for or be currently receiving benefits, or you must have been divorced at least two years.
If you qualify, then your social security amount will be 50% of your former spouse’s benefits, or 100% of your own benefits, whichever is greater.
Note that the amount you, as a divorced spouse, receive in social security benefits has no effect on how much your former spouse receives.
Credit Score Impact
IS MY CREDIT SCORE AFFECTED BY MY SPOUSE’S DEBTS?
Your credit file contains payment data from any credit cards and loans you had individually, as well as those you shared jointly with your spouse. Your credit file should not contain any data from loans that your spouse had individually. Thus, after divorce, you will apply for mortgages and loans based on your own credit history, and your former spouse’s credit score should not affect yours.
AFTER DIVORCE, CAN MY FORMER SPOUSE’S ACTIONS HURT MY CREDIT?
Yes. After divorce your own credit score may be affected if you still have joint debts together and your former spouse misses payments on the debt. The divorce court cannot alter a pre-divorce relationship between you and a third party (such as a mortgage lender). So, even if the divorce court assigns a joint debt to be paid by your spouse, if your spouse does not pay the debt, then the creditor can ask you to pay it, sue you to force you to pay it, and report nonpayment to the credit bureaus. This is only true of joint debts.
WHAT CAN I DO TO PROTECT MY CREDIT AFTER DIVORCE?
You and your lawyer can take some steps to help reduce your liability if, after divorce, your former spouse does not pay his or her debts.
- Obtain your credit report — and your spouse’s — and list all debts: joint, yours alone, and your spouse’s alone. Report any inaccuracies to the credit bureaus.
- Attempt to pay off all joint debts, or to refinance them into only one person’s name, as part of the divorce. For credit cards, this means paying them off and closing the accounts. For real property such as your home, this may require a quitclaim or bargain and sale deed on the property and for the person keeping that property to refinance the mortgage. If you have little or no joint debts remaining with your spouse, then your credit will be at lower risk if they miss payments.
- Consider asking the court to assign your separate debts to you, and your spouse’s separate debts to your spouse. If your spouse is instead assigned a debt that belongs to you, and your spouse does not pay it, then the creditor will seek payment from you.
- Ask for an indemnification clause in your property division. This provision states if one person is harmed because of the other person’s nonpayment, that the court can award reimbursement. Note that indemnification offers only money damages. The court cannot order a credit bureau to change your credit score. Some judges may be willing to compensate you for credit damage, but this is uncommon, and going back to court involves delay and lawyer’s fees.
- In some cases of joint debt, you may want to take over your former spouse’s missed payments, in order to avoid impact to your own credit score.
- If you suspect that your former spouse will file for bankruptcy, seek advice from an experienced bankruptcy lawyer. If a person files for bankruptcy after divorce, he or she is no longer liable for any joint debt that is discharged, even if the divorce court assigned the debt to that person. The creditor is then legally allowed to seek payment from the non-bankrupt spouse, even if the divorce court did not assign the joint debt to that spouse. More on bankruptcy and divorce is discussed in the next section.
Bankruptcy and Divorce
Divorces are expensive and can take a major toll on the net-worth of both spouses, especially once their property is divided. You or your spouse may choose to file for bankruptcy during or after your divorce is finalized. Unlike a divorce petition, which is filed in state court, a person must file for bankruptcy in federal court.
When someone files for bankruptcy, the bankruptcy court orders an “automatic stay,” or suspension, of all creditor judgments and collections. A divorce court’s property division order would violate the automatic stay. Therefore, it is essential for your lawyer to monitor whether your spouse files for bankruptcy during your divorce. A federal filing trumps most state court legal actions, including your divorce.
You or your spouse may also file for bankruptcy after your divorce. Even if your spouse is required to pay a certain joint debt in the divorce judgment, you may still be liable for the debt if your spouse files for bankruptcy and has the debt discharged. As a result, it is important to consider the likelihood of bankruptcy when you are negotiating your property settlement.
Bankruptcy will not discharge an obligation for child or spousal support.
Taxes and Divorce
CAN I TIME MY DIVORCE FOR THE BEST TAX CONSEQUENCES?
As your divorce proceeds, you may wish to obtain advice from your lawyer and accountant regarding the tax consequences of the timing of your divorce. Your lawyer may be able to affect your filing status for one tax year, simply by controlling the date that your divorce judgment is entered by the court.
WHAT IS MY MARITAL STATUS FOR TAX PURPOSES?
If you are married on December 31 of a tax year, then you must file your tax return for that year as married (either filing jointly or separately). If you are divorced on December 31, then you must file as a single taxpayer for that year, even if you were married more than half the year.
SHOULD I FILE JOINTLY OR SEPARATELY?
If your divorce is not final before December 31 and you and your spouse must file as married (even though you are in the process of divorcing), you must also decide whether to file your taxes jointly or separately. A married couple with disparate incomes is usually better off filing jointly. However, a married couple with similar incomes, especially if they are high incomes, will often be better off filing separately. Note that some tax benefits are not available to those who are married filing separately, including the dependent or child care credit, earned income credit, adoption credit and education credits including the student loan interest deduction. A spouse filing separately has only half of a joint-filer’s child tax credit, itemized deductions, standard deductions, retirement savings credit, and personal exemptions, and a separate-filer’s capital-loss deduction is limited to $1,500.
FORMER TAX LIABILITIES
If you file a joint tax return with your spouse, you will usually share liability for all taxes shown on that return — including any failure to report taxes. Nonetheless, you might be considered an “innocent spouse” with no liability if you can prove certain factors, including that you didn’t know of the tax understatement. You might also avoid the tax liability if you are no longer married to or no longer living with your spouse.
TAX DEPENDENCY EXEMPTIONS FOR CHILDREN AFTER DIVORCE
Ultimately, only IRS regulations control whether you (versus your former spouse) are eligible to claim your child as a dependent for tax purposes and receive the dependent tax exemption. The IRS defines the qualifying parent as the “custodial parent,” which is “the parent having custody for the greater portion of the calendar year.” Your divorce court’s declaration of who is the “custodial parent” does not change the IRS definition for tax purposes. The IRS and court judgment define the terms differently, and you may be the custodial parent by one’s definition but not the other.
Despite this technicality, in practice your divorce decree will usually include a provision stating either that you and your former spouse will share the exemption (usually alternating years) or to have one parent receive the exemption. If a parent who does not meet the IRS definition takes the exemption, then the other parent must sign a written declaration to be attached to the non-custodial/non-qualifying parent’s income tax return. The non-qualifying parent will also receive the child tax credit. Therefore, before you agree to deviate from the IRS rules, you should carefully consider the tax impacts of keeping or waiving the dependent tax exemption.
DEDUCTIBLE SUPPORT EXPENSES
Spousal support is tax-deductible by the person paying it, and taxable as ordinary income to the person receiving it. However, this is only true if the spousal support is paid in cash. If the divorce court awards property in lieu of cash spousal support, it may not have the same tax treatment.
Child support is not tax-deductible by the person paying it, and not taxable to the person receiving it.
TAX CONSEQUENCES OF PROPERTY DIVISION
The divorce court’s distribution of your home and other property usually does not create any income tax consequences. But if you have a family business or rental property that the court orders sold, then the sale may create a tax burden. The sale of certain kinds of stock options also creates income tax liability upon exercise (the options’ owner has to report the “bargain element” as income for the year in which the options are exercised).
If you have any significant property interests, beyond a marital home or bank accounts, then you should ensure that your divorce lawyer also has tax law expertise and consults with qualified tax professionals.