Managing Debt As A Couple

Not all debt is bad debt for couples. Many people need to borrow for a big purchase like a home, car, or wedding, and taking on reasonable amounts of debt can actually increases your credit rating.

The trouble comes when you or your partner are juggling several different debts, racking up high interest debt (e.g., credit cards), or making only the minimum repayments each month. And your partner’s debt can quickly become your problem, too. For starters, you could be legally on the hook for your partner’s debt. Even if you’re not legally responsible for it, your partner’s debt can affect your ability to make big purchases like a home or a vacation and impact important decisions like whether to have kids.

If you are feeling stressed about you and/or your partner’s debt and don’t know where to start, it’s time to (i) figure out where you stand and (ii) create a plan to pay off your debt.

Where You Stand

When tackling debt as a couple, you should start by determining who is legally responsible for the debt – i.e., is it joint or solo debt? That’s because shared debts are, of course, a shared responsibility. They can affect both partners’ credit rating and creditors can come after both partners’ assets and income.

If you aren’t married or in a same-sex domestic partnership or civil union, it’s usually easy to figure out. If both of your names are on the account, card, or contract, it’s probably a shared debt. If not, it’s probably one person’s debt.

But if you are married or in a same-sex domestic partnership or civil union, the answer largely depends on where you live and when the debt was incurred. Where you live matters because some states (AZ, CA, ID, LA, NV, NM, TX, WA, and WI) have “community property” rules. In these states, debts incurred by one spouse during marriage are typically the responsibility of the couple, even if only one partner signed off on the debt. The timing of taking on the debt also matters because, generally speaking, debt incurred by one spouse before marriage is that person’s debt alone, even in community property states.

Once you figure out who is legally responsible for the debt, you should make sure that the debt isn’t still growing. A partner with $30,000 student loan debt is one thing. A partner who owes $30,000 and counting on five credit cards is another. A spending problem is not the same as a debt problem.

Also, you should crunch the numbers to figure out the exact damage – what you owe, how much interest you are paying, and what your minimum payments are.

Paying Off Your Debt

Once you know where you and your partner stand with debt, it’s time to create a plan to pay it off.

If you or your partner’s debt is out of control, you should consider entering a debt management plan or calling the National Foundation for Credit Counseling.

But assuming your debts are manageable, it’s time manage them. Start by deciding how much to pay down each month – that means balancing your financial priorities. Do you want to put every extra penny toward clearing your bills quickly while living frugally for the next few years? Or would you rather live more comfortably and take a few more years to pay off your debt? Using a financial calculator is a good starting point, and you should talk to your partner to find the best balance for you.

Next, find strategies to reduce your interest and ensure on-time payments. Here a few of options to consider:

• Renegotiate your interest rates – Try contacting your lenders to see if they are willing to reduce the interest rate or the minimum payments on your loans. It might seem unlikely that your lenders will listen, but remember that they are better off if you pay off your loan, instead of defaulting. Even if they only offer temporary adjustments, anything helps. And if your financial situation has changed recently, make sure you tell your lender because you might qualify for a hardship program
• Debt stacking – If you have multiple sources of debt, you should consider ‘debt stacking (http://www.whatsthecost.com/snowball.aspx). That is, make minimum payments on all of your debts except the highest-interest one, into which you plow every spare penny. Once that first debt is cleared, you repeat the process with the next-highest rate of interest, and so on, until it’s all cleared. Although paying off smaller debts first (i.e., snowballing your debt) may make more intuitive sense, doing so only makes financial sense if the smaller debts have the same or higher interest rates (or fees) than your larger loans.
• Consolidate your debt – You could also consolidate all of your debts into a single loan. That means borrowing a chunk of money to repay all your debts at once, so you only have one set of loan repayments to worry about. Consolidating debt can help you simplify your repayments, but it can also push you into bankruptcy faster, so consider seeking independent advice before taking this step.

A lot to consider. But you’re on the path to zero debt. Enjoy the journey!