Divorcing? Your kids don't need a money martyr
Children need stability, not a parent sacrificing herself into the poorhouse
To Her Credit
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Steward Radio and other programs. See her website SallyHerigstad.com
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Dear To Her Credit,
My husband and I recently decided to divorce. The split is amicable, and we remain friends as we co-parent our two young children. My top priority is making sure my two children have minimal disruption as my husband and I navigate the divorce process. We have decided to hire a mediator, who is a personal friend. I have no legal representation as the mediator represents my husband. I have decided to let him keep the house and if he decides to sell it, any equity for the sale that I would be entitled to will be put into a college fund for my children.
In turn, the mediator is calculating that I pay a reduced monthly child support payment of around $600 to $800 a month. It is normally 25 percent of gross salary in Texas. I was out of work for most of 2012, and I accumulated about $30,000 in credit card debt. I am working now and making $80,000 a year, but now that I have moved out, my living expenses have increased to the point where I have been unable to make even the minimum payments on my credit cards. I was contacted by a company that negotiates debt with my lenders. I pay them $352 a month, which goes into an escrow account. The debt is negotiated with each lender and the agreed-upon amount is paid to the lender out of the escrow account. If I keep paying the $352 a month to the debt relief company, it will be roughly four years to accumulate enough money in the escrow account to pay all my creditors the negotiated amount.
I know my credit will suffer greatly from this, so my question is what is the best way to rebuild my credit as soon as possible? One friend of mine mentioned a prepaid credit card. Is it an option? Any guidance would be greatly appreciated during this difficult time. -- Emily
With all the things going on in your life, your question is whether you should get a prepaid credit card? Let's back up.
Your ex gets the house, child support and the mediator. You get the debt, which you apparently accumulated before the divorce. (Texas is a community property state, so the debt may legally belong to your ex as well as to you.) The one thing you have left is equity in the house, and you're turning that over to a college fund for kids who you say are still young.
After you've been pummeled by the divorce, you want to turn to a debt negotiation company. From the looks of it, you and your credit score got will get slammed some more. By the time you're done with this deal, assuming the company does what it says it will and pays your creditors, you'll have paid almost $17,000 on the $30,000 debt. You can work something out on your own without having to pay the debt company.
Although $30,000 in credit card debt is unpleasant, it's not insurmountable. Consider it the price of a modest car. You can work something out with the credit card companies yourself -- perhaps lower payments temporarily. Debt negotiation companies generally charge a hefty fee. You're better off using that to make your payments.
If your ex sells the house, you can use part of your proceeds to pay off your debt. I know you want to put it in a fund for the kids, but that money is already spent. Plus, if you have no other emergency fund or savings, I urge you not to put any leftover equity in dedicated education funds in your children's names. Your financial survival right now is more important than having a college fund set up 15 years before the kids need it.
Think of it this way. Your kids need you to be financially stable and able to co-parent them right now. They need you to set a good example of how to handle money, and to project a sense of strength and security. How can you do that if you are broke and wondering how to keep a roof over your head?
You make a good income. Your kids need a parent, not a martyr. You must take care of your total personal financial picture. When you're back on your feet, you can start contributing regularly to a college fund for the kids.
If it's not too late, ditch the mediator. A "personal friend" who mediates only on behalf of your husband is neither a friend nor a true mediator. Get legal representation -- now.
Many people in the midst of a divorce are so traumatized that they just want to play meek and mild and walk away with nothing. You can't afford to do that. Take care of yourself and your credit. That's the best way to make sure you can take care of your kids, too.
Last, and possibly least in order of urgency in your situation, a better choice than a prepaid card would be a secured card, which can help you start rebuilding your credit score. However, the best way to improve your score is to pay your bills on time, without fail, over a long period of time. That's why looking at your total financial picture and avoiding unnecessary harm to your score is higher on the list than trying to figure out how to recover later.
See related: Credit card debt negotiation in 3 (not) easy steps, 6 financial mistakes to avoid in divorce
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Published: June 7, 2013