Merging finances before getting married may seem like a good way to test-drive a relationship before you and your partner tie the knot.
If you break up, though, shared debt and credit obligations can leave you tied to your ex.
“People need to look at their personal finances like running a business, and that means looking at a relationship like a business merger,” says Leslie Tayne, a New York-based financial attorney and debt specialist. “It might not sound romantic, but if you do that, you won't make emotional decisions about money, which will make it so much easier if you need to walk away.”
Whether you're beginning a new relationship, thinking about taking things to the next level or are recently separated from your partner, these tips will prevent you from becoming too financially entangled — and help you extricate yourself if you do.
An ounce of prevention
Throughout her decades of experience as a financial adviser, Debra Neiman has seen unmarried couples share all sorts of assets, including bank accounts, credit cards, mortgages and home equity loans. But when these relationships end without the formality of divorce courts, one partner often ends up bearing the entire debt burden.
“That's why I'm an advocate of written agreements to accompany the comingling of assets or liabilities,” says Neiman, co-author of “Money Without Matrimony: The Unmarried Couple's Guide to Financial Security.”
This agreement, says Neiman, should spell out the obligations of each person and document a contingency plan if the relationship dissolves. It's best to draft these documents before moving in together, Neiman says.
“The couple should do this when they're in love, because if they break up, it could get ugly,” says Neiman. ”By having their wishes on paper, it helps keep people rational during crisis periods.”
Neiman recommends couples hire a lawyer to draft this agreement or search for online services such as LegalZoom.com or Nolo.com, which provide basic co-habitation agreement templates.
Tips for untangling
What if you didn't take the proper preemptive steps to protect you and your partner from a messy financial breakup? There are a few things you can do to ease the debt disentanglement.
Tayne recommends couples begin by closing any joint credit or bank accounts so neither person can access them. Then establish a plan and budget together that will allow both of you to responsibly repay the remaining debt.
“The payoff will be based on trust, so if you have a good relationship with your ex, this will be easier to achieve,” says Tayne. “And if you share a joint credit card, remember that the credit card company doesn't care that you've broken up. You are both equally responsible for the debt.”
This is not the case, however, if one person is designated as an authorized user on the other partner's account. The user is entitled to use the credit extended to the cardholder, but has no legal responsibility to pay the bill.
“Unfortunately, if you've designated your partner as an authorized user on the card, you don't have much legal recourse and you may just have to suck it up and pay the debt yourself,” says Elle Martinez, financial relationship expert and author of the blog Couple Money. “But if you have a joint account, there are some other options.”
According to Martinez, couples who share a joint credit card should contact the credit card company immediately following a breakup and inquire about a balance transfer. That way they can equitably split the balance and transfer those balances to new, individual accounts.
When it comes to co-signed loans (for a car, for example), Mindy Crary, a financial planning coach and author of the Creative Money blog, recommends that one person in the relationship refinance the loan in his or her name as quickly as possible.
“If you co-sign an auto loan for someone, you are on the hook for it,” says Crary. “So make sure the person you co-signed for assumes full responsibility of the loan after you break up.”
Ideally, Neiman says, both individuals need to walk away from the relationship without any shared debt.
“Sometimes you may be stuck with your ex's debt and have to chalk it up to a lesson learned,” Neiman says. “But no matter what, all assets and debt should be split and separated into each person's name as equitably as possible. You should walk away from the relationship financially unencumbered from the other person, even if that means selling property, refinancing or applying for new credit cards.”
Mixing money: Always a bad idea?
More and more couples are choosing to live together before (or in lieu of) marriage. According to the National Center for Health Statistics, which is part of the U.S. Centers for Disease Control and Prevention, nearly half of women between the ages of 15 to 44 cohabited outside of marriage between 2006 and 2010, compared with 43 percent in 2002 and 34 percent in 1995.
Sharing financial obligations may seem like a logical next step. Yet, even if you and your partner are sharing living space, just be sure you stop short of sharing credit or debt, experts say.
“If you're not married, my attitude is that anything beyond a joint checking account for paying bills makes things much too complicated,” Crary says. “If you live with someone and don't have marriage on the horizon, I recommend you just share a cash account and that's all. Then it's easy to divide if you separate.”
According to Tayne, most couples don't heed this advice because they equate shared financial obligations with a healthy, mature relationship.
“It's an emotional, knee-jerk reaction to combine everything, but I always advise people that it really isn't necessary,” says Tayne. “Just because you decide to keep separate debts doesn't change the relationship, and it's a much better way to manage your finances.”
Separate debt obligations, meanwhile, allow each person to maintain control over their respective financial futures, says Tracy Becker, president and CEO of North Shore Advisory, Inc., a New York-based credit education and restoration firm.
“One of the most common reasons people get into bad credit is because of the breakup of a relationship. It's not something people realize when they're caught up in the whimsy of love, but you need to be realistic and remain in control,” says Becker. “And the only way to do that is to keep things separate.”
Talking about money
If you decide to share finances with a loved one, tread carefully, and talk often.
Terri Orbuch, research professor, marriage therapist and author of “Finding Love Again: 6 Simple Steps to a New and Happy Relationship,” recommends couples ask each other these questions:
- What did money mean to your parents as you were growing up?
- What types of arguments did you parents get into over money?
- How have you spent your money in the past and what does that say about your perception of money?
- If you were in a previous relationship, what were some of the financial conflicts you experienced?
“This is an important conversation to have, even before you decide to move in together,” says Orbuch. “And don't wait till the breakup. By then it's too late.”