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Untangling joint debt can be messy after a break-up

Rachel’s relationship with her fiancée goes back five years, she told Ramsey. Over that period, they’ve managed to accumulate a sizable debt. They have at least five types of loans, ranging from a $90,000 mortgage, to $50,000 in combined debt on a car and truck they own together. The couple has another $8,000 in combined loans. However, they don’t have any joint bank accounts.

The decision to buy a house with friends or long-term partners is increasingly common. The rising price of housing coupled with a shortfall of affordable homes and stagnant wages have pushed more people to co-own real estate. Roughly 26.7% of all home purchases in the U.S. were completed by co-buyers this year, according to Co-Buy, a company that facilitates such transactions.

Rachel told Ramsey her relationship had broken down months ago, which is when she consulted a bankruptcy lawyer to see how they could untangle their joint debt. The lawyer recommended a bankruptcy filing. Ramsey isn’t convinced that’s the best path forward. “Asking a bankruptcy lawyer if you’re bankrupt is like asking a dog if it’s hungry,” he says.

Filing for bankruptcy as a married couple is complicated enough. It can be even more complicated for unmarried couples who’ve co-signed loans. However, Rachel and her ex seem to have enough assets to mitigate the situation without filing for bankruptcy.

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Selling assets is a preferred alternative to bankruptcy

Ramsey recommends a mutual agreement that unwinds the couple’s assets and leaves both Rachel and her ex in a better financial position. At the top of the list? Selling the house. Rachel estimates the home is worth $130,000, while the outstanding mortgage is worth $90,000. That means they could sell the house and split the proceeds.

Similarly, selling the car and truck would eliminate the debt burden further. Doing this should leave the couple with just a few thousand in loans that could easily be paid off — no bankruptcy necessary.

Selling assets to pay down debt instead of filing for bankruptcy can be a good idea in certain situations. The average U.S. household’s net worth is $1.06 million, according to the Federal Reserve’s latest Survey of Consumer Finances. Meanwhile, the average net debt per person is roughly $59,580, according to data from the Federal Reserve Bank of New York’s Household Debt and Credit.

That means selling real estate, vehicles or even stocks could help most Americans mitigate the impact of debt and higher interest rates. This might be the best solution for Rachel and her ex too, provided they can come to a mutual agreement.

If they can’t, Ramsey suggests Rachel sue her ex for the dissolution of a partnership. To be fair, Ramsey is a financial expert and not a lawyer, so Rachel might need to reach out to another expert — particularly since most states have different laws related to the dissolution of a domestic partnership.

The process can be complicated, which is why Ramsey (and many financial experts) recommend keeping debt and assets separate unless absolutely necessary.

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Vishesh Raisinghani Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.

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