How to Pay Off Credit Card Debt after Divorce

By Tracy Achen, WomansDivorce Editor and Divorce Coach 

Are you on the edge of financial ruin thanks to your divorce and credit card debt left over from your marriage? One of the unfortunate aspects of getting divorced is that it's hard to pay all the bills on just one paycheck. 

But when you’re struggling just to get by, what are your options for paying off the credit card debt after divorce? This guide will teach you how to determine how much you owe, the different options for paying off your debts, and the pros and cons of each one.

Finding Out How Much You Owe

Before you build your debt repayment plan, you need to determine what your credit report shows that you owe. You can go to AnnualCreditReport.com to get a free copy of your credit report from all three credit bureaus.

You may be shocked to see some of your ex’s debts showing up on your credit report. It’s important to understand that even if your divorce decree said your ex was responsible for certain debts, creditors aren’t bound by your divorce agreement. They are more concerned with whose name is (or was) on the account and whether the couple lived in a community property state at the time of their divorce. You can get an explanation the 5 factors creditors use to determine if you are liable for your spouse’s debts after divorce.  

Once you have your credit reports, make a list of every credit card balance, the interest rates, and minimum payments for each. This will give you a birds-eye view of everything you owe.

Options for repaying credit card debt after divorce

A lot of times it’s discouraging to see everything in black and white. But you can’t fix what you don’t know. Now it’s time to decide how you’ll tackle repaying the debt. Here are five options to consider to get your debt under control:

1. Establishing your own repayment plan using the snowball method  
2. Taking out a home equity line of credit to consolidate your debts  
3. Using a consumer credit counseling service to establish a repayment plan with lower interest rates
4. Using a debt settlement company to negotiate and reduce the total amount owed on your debts  
5. Declare bankruptcy and either wipe out the majority of your debts or establish a repayment plan

Establish Your Own Repayment Plan

You don't necessarily have to have loads of extra cash to pay off your debts. You just need to have enough left over from your paycheck to pay a little extra on one credit card bill each month. For example, if the minimum payment required on your credit card is $90 and you can spare an extra $20, you will send in a $110 payment.

The trick is to continue paying $110 each month (regardless of the minimum due) until the balance is paid off. Then you add that $110 to the minimum payment on the next balance, again keeping the amount you pay each month the same. For example, $110 + $50 minimum payment = $160/month.

• Pros: This system has the snowball effect and your balances will start to go down really quickly as you pay off one credit card and apply that amount to the next.
  
  
• Cons: If you fail to stop using your credit cards, it will be hard to ever pay the balances off.
  
  
• Impact on your credit: As you pay off the balances on each credit card, your credit score will improve as the percentage of available credit you have increases. It's important not to cancel a credit card once it's paid off because it will decrease the amount of available credit, which in turn will decrease your credit score. 

Pay off Your Debts with a Home Equity Line of Credit

If you received the house in your divorce and have some equity built up, you have the option of doing a home-equity loan to consolidate your credit card bills.

• Pros: Consolidating all your debts into one loan often means a lower monthly payment than paying each one individually. Plus, the interest rate on a home equity line of credit is often much lower than that charged by credit cards, so you will end up paying less interest on the debts in the long run.
  
  
• Cons: By using your equity line of credit, you are basically replacing your unsecured debt with a secured loan. What this means is that if you fail to make the payments on your consolidation loan, you could end up losing your house.
  
  
• Impact on your credit: Shouldn't adversely affect your credit, especially if you pay off the credit card balances and discontinue using the cards. Some people advice canceling the accounts, but this can actually drop your credit score. Just put them somewhere safe where you won't be tempted to use them.

Enroll in Consumer Credit Counseling

If you have less than $10,000 in unsecured debts, you might consider using a consumer credit counseling service. These companies can help you get your finances under control by developing a budget and repayment plan that is realistic for your situation. They can also act as a go-between with your creditors, often negotiating lower interest rates and smaller minimum payments while you are working with the credit counseling service.

With this option, you make one payment to the counseling service and they distribute the money to your different creditors. There is usually an initial fee to start all the paperwork and a monthly fee to administer the payments.

• Pros: Using a consumer credit counseling service can help you get everything under control while you are getting back on your feet. They seem to be a little more reasonable about what you can realistically pay each month on your debts as compared to the credit card companies.
  
  
• Cons: Takes longer to pay off your debts than other methods and you need to verify for yourself that your debts are being paid according to the agreement.
  
  
• Impact on your credit: Some credit counseling services require you to close accounts once they're paid off. And if your debt was negotiated for an amount less than owed and paid off through a credit counseling service, your creditor will report the debt as settled. Both of these actions will temporarily lower your credit score. However, if the account stays current or is paid in full, this should help your credit score.

Use a Debt Settlement Company 

With this option, you basically hire a settlement company to negotiate with your creditors to reduce the total amount of debt owed. Most settlement companies require individuals to have more than $10,000 in unsecured debt to qualify for their program.

• Pros: You only have to make one payment to the settlement company instead of all the different credit card companies and the total amount of debt owed is often reduced. Additionally, most debt settlement plans enable you to pay off your debts in 2 to 4 years.
  
  
• Cons: The settlement company often charges a percentage of your total debt as reimbursement for their services. You'll also have to pay taxes on the amount that your debts were reduced by. For example, if you had $12,000 in debts that were reduced to $8,500, you will owe taxes on the $3,500 difference.
  
  
• Impact on your credit: You credit score will be hurt while the debts are being negotiated. Once your obligations are paid off, your credit will start to improve within a year or two.

You can find companies that will help negotiate with your creditors by searching online for an established company. Be sure to check with the Better Business Bureau and read online reviews before signing any paperwork to verify you'll be working with a reputable company.

Declare Bankruptcy

This should be your last resort when it comes to getting rid of your credit card debts after divorce. Due to the stricter bankruptcy laws, not all people qualify to have all their debts wiped out with a Chapter 7 Bankruptcy filing. If you don't qualify for Chapter 7, you will need to file for Chapter 13 Bankruptcy. Under this method, you'll have to participate in a credit counseling program and have to work out a repayment plan to pay off your creditors.

• Pros: If you qualify for Chapter 7 bankruptcy, most of your debts will be erased, enabling you to have a fresh start. Also, creditors can't continue to hassle you after you've filed for bankruptcy.
  
  
• Cons: Bankruptcy doesn't discharge all debts. Obligations that aren't usually affected by a bankruptcy filing include taxes, alimony, child support, student loans, etc. If you file for Chapter 13, you'll have a 3-5 year time-frame in which to catch up on your delinquent accounts.
  
  
• Impact on your credit: Filing for bankruptcy can damage your credit score for 7 to 10 years, making it hard for you to qualify for future loans.

Final Thoughts

Before you choose a method for paying off your credit card debts, be sure to do your homework. If you choose an outside company to help you, check their standing with the Better Business Bureau to ensure that you are working with a dependable company. 

And while you’re working through your repayment plan, remember to celebrate the small wins. Paid off a credit card or made every payment this month? That’s progress. Financial freedom is a series of small steps, not a giant leap.

Now is also a good time to create a realistic budget that supports your new life. Consider tracking your spending for a month to see where your money is really going, and you can use these free budget worksheets to help you get started.

Related articles:

• Dividing Credit Card Debt in Divorce
• Divorce and Bankruptcy
• Getting out of Debt after Divorce 
• Protecting Your Post-Divorce Credit