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,
- 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
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
- 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
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
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
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.
Read More: Special Divorce Cases