Family Debt After Divorce

Acknowledging social changes, Congress recently rewrote some of the debt guidelines involving divorced couples whose financial lives remain entwined.

  • The "Innocent Spouse" Bill. This bill was recently passed as part of a larger IRS reform. It helps divorced individuals who owe back taxes for debts that were incurred by signing a joint return. The individual can now file as an "innocent spouse" and be relieved of paying back taxes that are really the responsibility of the ex-spouse.
  • The Separate Liability Election. This provision addresses individuals living apart for at least 12 months from the time a joint return, on which taxes are still owed, was signed. Using the "separate liability election," the individual can now have the liability for the debt limited to only the items that are directly allocable to the individual.
  • 402(k) and Retirement Benefits. Although both partners in a marriage can expect to benefit equally from each other's retirement funds, Congress last year vetoed a provision that would have required spousal approval for any withdrawals from retirement funds. The veto leaves open the ability for a vindictive spouse to "raid" a retirement fund and effectively erase its assets.
  • Credit card debt. Debt incurred on a joint account remains the responsibility of the cosigners until the account is paid in full, no matter what a judge decided in court. In other words, VISA is not involved in divorce decrees!