Divorce is never simple. They are exhausting both mentally and financially. People frequently want loans through a divorce to pay bills or begin a new life. However, a loan while divorcing can be complicated.
In this article, we’ll guide you through the process of obtaining a loan while going through a divorce, the various loan options, what to avoid, and how to seek professional assistance.
Should I get a loan while divorcing?
Divorce can be financially devastating. Many people struggle to make ends meet during and after the divorce process. It’s common for people to want to get a loan while divorcing to pay for legal fees, living expenses, or to start a new life. However, before you apply for a loan, you need to make sure it’s the right decision for you.
Start by considering your financial situation carefully. Adding additional debt could worsen your situation if you’re already in debt. You need to make sure you can afford to repay the loan and that it won’t put you in a worse financial position.
If you decide that taking out a loan is the best option for you, be sure to do your research and find the right loan for your needs.
Types of loans
There are several types of loans you can consider when getting a loan while divorcing. Here are some of the most common loans:
Home equity loans
If you own a home, you can take out a home equity loan. Home equity loans allow you to borrow against the equity in your home. They usually have lower interest rates than personal loans, but they are secured by your home. If you can’t repay the loan, you could lose your home. If you own your home with your spouse, he will need to be involved in the process to qualify and apply for this loan.
Credit cards
Credit cards can be a convenient way to borrow money, but they often have high-interest rates. If you’re planning to use a credit card to pay for expenses, make sure you can pay off the balance quickly to avoid accumulating debt.
401k Loans
Taking a loan from a 401(k) is a financial option available to individuals who have a retirement savings account through their employer. When facing a financial need during divorce, some people may consider borrowing against their 401(k) plan. This type of loan allows individuals to access a portion of their retirement savings, typically up to 50% of the vested account balance or a maximum specified amount. While a 401(k) loan can provide a quick and relatively easy source of funds, it’s essential to consider the potential drawbacks. Repayment of the loan typically occurs through regular paycheck deductions, including interest, and failure to repay can result in penalties, taxes, and a reduction in retirement savings. Therefore, it’s crucial to carefully evaluate the long-term implications before opting for a loan from a 401(k) and to explore alternative options, such as personal loans or budget adjustments, to minimize the potential impact on future retirement plans.
Loans from Family
Many people will turn to family members if they need to borrow money during the divorce. These loans are often flexible, however, a loan from a family member can have implications depending on various factors and the specific laws of your jurisdiction. Here are a few potential ways it can impact your divorce:
- Division of Assets: During divorce proceedings, marital assets are typically divided between the spouses. If you have received a loan from a family member during the marriage, it may be considered a marital asset and subject to division. The loan amount might be factored into the overall distribution of assets, potentially affecting how property, finances, and debts are allocated between you and your spouse.
- Repayment Obligations: If you borrowed money from a family member, the divorce court may consider the loan as a debt that needs to be repaid. Depending on the circumstances, the court may assign responsibility for repaying the loan to you, your spouse, or both. This can impact the financial obligations and support arrangements in the divorce settlement.
- Characterization of the Loan: The characterization of the loan can also play a role. If the loan is deemed a gift or part of an inheritance, it may be treated differently from a loan that has a clear repayment agreement. Gifts and inheritances are often considered separate property and may not be subject to division in a divorce. However, if the loan has a legally binding repayment agreement, it may be viewed as marital debt.
- Documentation and Proof: It’s important to have proper documentation and evidence regarding the loan, including the terms, repayment schedule, and intent behind the loan. This can help establish the nature of the loan and support your position during divorce proceedings.
It’s crucial to consult with a divorce attorney who is familiar with the laws in your jurisdiction. They can provide specific advice based on your circumstances, help you understand the potential impact of a loan from a family member, and guide you through the legal process to protect your rights and interests.
What to avoid
Predatory lenders
Predatory lenders target people who are in financial distress. They offer high-interest loans and often have hidden fees. If you’re considering a loan from a lender, do your research and make sure they are reputable.
High-interest rates
Some lenders may offer loans with high-interest rates, especially if you have poor credit. High-interest rates can make it difficult to repay the loan and could put you in a worse financial position.
Hidden fees
Some lenders may have hidden fees that can add up quickly. Before you agree to a loan, make sure you understand all the charges associated with it.
How will debt acquire during the divorce impact the outcome?
A loan taken out during a divorce can potentially impact the divorce settlement in a few ways:
- Marital Debt: If one spouse takes out a loan during the divorce process, it may be considered marital debt and factor into the overall division of liabilities. When dividing assets and debts, the court will typically aim for an equitable or fair distribution. The loan amount may be allocated between the spouses based on factors such as each party’s financial situation, income, and contribution to the debt.
- Financial Stability: The loan can affect the financial stability of the borrowing spouse, potentially influencing the determination of spousal support or alimony. If the loan was taken to cover immediate expenses or maintain a certain lifestyle, it could impact the borrowing spouse’s financial needs and their ability to support themselves post-divorce.
- Repayment Responsibility: Depending on the circumstances, the court may assign the responsibility for repaying the loan to the spouse who took it out, or it may be allocated between both parties. The court will consider factors such as the purpose of the loan, each spouse’s ability to repay, and any existing financial agreements or obligations between the parties.
It’s important to note that the specific impact of a loan taken out during a divorce can vary based on jurisdiction and the unique circumstances of the case. Consulting with a divorce attorney is crucial to understanding how such a loan may affect your specific situation and to navigate the legal implications effectively. An attorney can provide guidance on how to best present and handle the loan within the context of the divorce settlement negotiations or court proceedings.
Get Help From Professionals
At Purposeful Wealth Advisors, we work closely with divorce attorneys, accountants, and other dedicated professionals to develop comprehensive solutions for our clients.
Our team can help you navigate the loan application process, find the right loan for your needs, and ensure that you don’t take on more debt than you can handle.
Contact us today to schedule a consultation.
Opinions expressed are those of the author and are not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
