Woman in divorce weighs saving vs. reducing debt

IMichelle Singletary

t's hard enough when your marriage is broken, but what do you do when the breakup also leaves you broke?

That was the question I received from a reader during a recent online discussion.

The emotional damage of divorce, coupled with the financial stress of picking up your life afterward, can leave people paralyzed, not knowing what to fix first. Do you sacrifice saving to pay off debt? Or do you let the debt sit while you save?

The reader wants to refinance the mortgage in her name only. There's a bit of equity, but she expects to be legally obligated to split it with her ex. But here's the problem with refinancing: She and her husband got behind in their mortgage payments. Although she has caught up on the past-due payments, the delinquency did a lot of damage. Her credit score is below 500. Scores of 500 or below land you in the riskiest credit tier.

And there's the other debt: student loans and credit cards.

"I have $5,500 in credit card debt," she said. "A medical emergency is what got us really behind and cut into our savings. Had my husband been working, we would've managed, because technically I can handle all the bills on my salary alone, if I stop with the restaurant lunches — please stop making that face."

So what now? Here are responses to this soon-tobe divorcee's questions on how to get back on track financially.

Q: Should I focus on rebuilding the emergency fund or put as much money as possible toward the accounts in collection to get rid of them? I've deferred my student loans because it was too much of an added burden, but once I pay off the other debt, I'll have more to throw at the loans.

A: When it comes to saving versus paying off debt, it's not an either/or situation. You have to do both. If you already have credit card debt, and you have no savings for a financial emergency, you'll make a bad situation worse.

I suggest saving at least $1,500 in an emergency fund. Once you hit that target, stop and put any extra funds toward paying down the credit card debt. While you are building up your savings, make just the minimum payment on the cards.

And definitely work to get the student loans out of deferment because that, too, is adding to your debt burden.

Q: What's the likelihood my current mortgage company will work with me to refinance?

A: You might have a better chance to refinance with your current lender. If you have an Fha-insured loan, look into a "streamline refinance." Still, your recent history of late or no payments on the mortgage and credit cards will make refinancing challenging. However, with a good income and enough on-time payments, you might eventually be able to refinance with favorable terms.

Readers can write to Michelle Singletary c/o The Washington Post, 1301 K St., N.W., Washington, D.C. 20071. Her email address is michelle.singletary@washpost.com.