Merging two households into one is an exciting time for newlyweds. But it can also come with hidden challenges. One of those is the financial challenge when one spouse owes debt. How will you be affected by your partner's debt? Can your money be affected by creditor calls, garnishments, liens, tax offsets?
Here's a handy guide to how your spouse's debt affects you, based on each type of debt incurred.
Generally, debts incurred before you were married are the legal responsibility of only the person whose name is on the debt. Unscrupulous creditors may attempt to convince you that you must pay such debt, so it's important to understand your rights and obligations.
As for debts incurred during the marriage, a lot depends on where you live. Some states rule that assets and debts taken out during the marriage are "community property" of the married couple and may be the responsibility of either party. These so-called "community property states" include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
If you do not live in a community property state, you are generally only responsible for your spouse's debts if the debt is considered to have benefited the marriage (such as food, clothing or shelter) or both spouses undertook the debt together.
Tax or Child Support Debt
Tax debt or delinquent child support debt can be difficult to prevent from damaging the new family. When a couple files taxes jointly, the IRS or the state's taxing authority may keep the couple's refund (if there is one) to pay the delinquent debt of one or both parties. This is known as an "offset." Some taxpayers only find out about federal debts held by their partners when their refund is confiscated to pay the debt.
If you suspect your refund may be offset, it's beneficial to talk with the agency to whom money is owed and begin a payment plan to get back in good standing or ask if there is a deferment option. This may prevent refunds from being taken come tax season.
If this is not possible, there is a provision to protect your portion of the tax refund. It's called "Injured Spouse Allocation" and it allocates the income, expenses, deductions and tax due or refunds between both parties. Injured Spouse Allocation can be claimed using Form 8379. You may need to work with a qualified tax preparer or CPA to complete Form 8379, since it can be a little complicated to separate all tax-related items.
Student Loan Debt
Federally-backed student loans or child support may also be subject to the Federal Offset Program. The best way to protect your assets from these debts is to get them back into good standing before tax season begins.
If your debt is for student loans, be sure to look into all repayment or consolidation options and see if any changes could get you out of default status. These options include:
Consolidating existing debt into one new loan may reduce your payments and clear the slate on old debts.
Forgiveness programs, such as the Public Service Loan Forgiveness program may qualify you to have the remainder of your loan written off after 10 years working in public service.
Income-based repayment plans (including Pay-As-You-Earn), cap payments based on your current income.
Understanding your rights and all your options when it comes to your spouse's debt is key to preventing it from affecting your own financial situation. Whether it entails choosing a new repayment option, preventing tax offsets or knowing your rights, the work you put in now will help you stay on good financial footing for many years to come. For assistance, talk to professionals like The Callen Accounting Group, PLLC.Share