By Vanessa Papas
In 2016, Kanye West announced he was $53-million in personal debt for his fashion line. A month later, his wife Kim Kardashian West transferred $53-million into a joint account, leaving fans believing she paid off Kanye’s debt. Stephen Baldwin and his wife accrued $2-million in debt on their joint account. When Mike Tyson filed for bankruptcy in 2003, his filing disclosed more than $27-million worth of debt, including millions owed to the IRS. At the time he was married to Monica Turner, who cracked under the financial pressure.
“’I have a great deal of debt’,” said no one on a first date, ever. This is fair, because the start of a relationship doesn’t require this level of disclosure,” said Kenosi Magosha, Head of Client Solutions Savings. “But at what point in one’s relationship should you and your partner have the honest discussion around finances and debt?”
Why should I disclose my debt? One thing to appreciate about debt is that it’s borrowing from future income and directly affects any future financial plans. The partner without debt may need to sacrifice some of their future income to help clear the debt. This then means your partner’s lifestyle aspirations and financial goals can be negatively affected. If the relationship is important to you, it is important that you play open cards to ensure that you can avoid unnecessary conflict and a potential break-up over money matters.
When should I say something about my debt? The moment you start considering a future with your partner, you should discuss how you will deal with finances relating to that future and if there is any debt to be noted and tackled. Your approach to debt will also be important when you consider how you fund any celebrations for your wedding or traditional ceremonies to formalise the relationship. First prize would be to save up beforehand to avoid starting off your partnership with debt, which can cause tension in the early years of marriage.
We’re marrying out of community of property, why does my debt matter? In antenuptial contracts that set out a separation of assets and liabilities before and after marriage, one spouse’s debt has no direct impact on the other and is not the legal responsibility of the other. Inheritances and donations that one receives will generally be protected from their spouse as well and not subject to attachment by the other spouses’ creditors. Though, an indirect impact can result from the indebted spouse’s inability to contribute towards the household expenses, which can cause resentment and emotional stress. Other issues can arise down the line as one spouse’s debt will reduce the inheritance the surviving spouse can expect to receive. For example, if the matrimonial home is mortgaged, the surviving spouse and children may have to vacate and sell the property if they can’t afford the mortgage bond repayments. Similarly, in the event of divorce, the spouse requiring maintenance for themselves and the children will be severely affected if the ex-spouse is unable to provide adequate financial support.
We’ll marry in community of property, what is my risk related to my partner’s debt? When you marry in community of property, the debt and assets of the couple are combined to form a joint estate. You are effectively each liable, in your personal capacity, for the others’ debt. Creditors are generally entitled to claim the full debt (and accrued interest and legal costs, if applicable) from either spouse. The debt is not split in half as far as the creditor is concerned. Therefore, if you believe that your spouse is heavily in debt, which may be unmanageable for you in the event of the relationship ending, you are strongly encouraged to seek professional financial advice. If you expect to inherit or receive a donation, for example from your parents, and you are married in community of property to a person who has significant debt or engages in a risky business practise, you should ensure that those monies and assets are rather held in a trust for your benefit.
How can I deal with my partner’s debt without enabling financially irresponsible behaviour?
The issue of how to help your partner depends on the type of debt which the partner is bringing into the relationship. There is good debt and destructive debt. If your partner is bringing good debt to the relationship, this can potentially benefit your journey to create wealth together. On the other hand, the start of your wealth building journey together will be compromised if your partner has destructive debt or what’s commonly referred to as ‘bad debt’. But the reality is that it’s not the end of the world. If the relationship is important to you, then you’ll need to put in the hard work to get
you on the right financial path as a couple. It is important that good money management foundations are put in place, such as agreeing how to pay off this debt and not taking on more.
How Can I Help My Partner With Their Debt?
IT’S advisable to get the help of a financial planner if you and your partner are overwhelmed by the amount of debt and don’t know where to start. A legal advisor can also help you to look at options of limiting the exposure of your assets to creditors. Good principles to keep in mind in your discussions are:
♦ Identify which is good and bad debt.
♦ Identify the debt that costs the most and tackle it first.
♦ Don’t compromise on paying for the debt relating to the roof over your head.
♦ Pay more than the minimum amount required by the credit provider to pay off the loan faster.
♦ Avoid taking on more debt.
♦ Consider if you have unnecessary items that can be sold to help pay off the debt, or if you can downsize e.g. sell an expensive car for a cheaper more efficient model.
♦ Ensure you have protection for the unexpected e.g. life insurance or disability insurance to pay off the debt. This will ensure that the surviving partner and any other dependants or children are not left destitute or without a home.
♦ Look at ways to protect any existing assets you have from being exposed to your partner’s creditors.
By Vanessa Papas