Annulment vs. Divorce: How it Impacts Finances

The Kim Kardashian-Kris Humphries marriage split has been called everything from a distraction to entertainment, but if the couple's union is annulled -- as Humphries is reportedly trying to do -- it may actually prove to be a lesson in how some couples can avoid some of the financial disputes that come with divorce.

Unlike divorce, which recognizes that a marriage has an official beginning and end, an annulment retroactively declares the marriage to be null and void. "When a couple gets an annulment, it's as if the marriage never existed to begin with," says Kristin D. Hofheimer, a divorce attorney in Virginia Beach, Va.

What that means for your finances is this: In an annulment, the courts do their best to restore the individuals to their original financial state. So, what money and property you brought into the marriage is what you should walk away with, including any debt you brought into the marriage. Joint assets and debt accumulated together during the marriage are typically divided equitably.

But qualifying for an annulment isn't a walk in the park, as certain grounds must be met in order for it to be granted.

Here are some of the more common reasons an annulment may be allowed:

  • If fraud or concealment is involved, such as one party keeping important information from the other, such as a drug addiction or a felony.
  • The refusal or inability of one party to consummate the marriage.
  • The determination that the two parties are close relatives and are in an incestuous marriage.
  • The determination that one or both parties were unable to consent to marriage because of a lack of understanding, such as the case of someone who is mentally ill.

While marriages of any length can be annulled, many states have time limits for filing based on when the grounds for annulment took place. For example, in Illinois, if you want to get an annulment because of fraud, you have 90 days to make the claim after you learn about the fraudulent event. In Minnesota, if you want an annulment because one party is unable to consummate the marriage, you must file the motion within one year.

The financial consequences

Since an annulment negates the marriage's existence, the way it impacts a couple's debts and assets are such:

  • Both parties are restored to their original financial state, meaning the debt and assets they each entered the marriage with is what they leave with.
  • If the couple has amassed debt jointly while in the marriage, "it would be just as though you and your cousin went and got a credit card together," says Hofheimer. In the creditor's eyes, both parties are 100% responsible for the debt and, therefore, the creditor could come after either one of them, or both.

Couples who are in the process of getting an annulment and want to be proactive about their finances can typically approach joint debt in one of two ways:

  • They can split the amount owed and each pay their share to take care of the debt.
  • One party can pay the entire debt and then sue the other party for half. If you're trying to protect your credit, you may want to take care of the debt and let your ex reimburse you so you know an unpaid bill won't end up bringing down your credit score, Hofheimer says.

Financial headaches averted

If a couple can get an annulment granted, they can sidestep some of the drawn-out financial disputes that can result from a divorce. In divorce proceedings in many states, the court can determine that debt amassed in the marriage is marital debt, regardless of whose name might be on a credit card, Hofheimer says.

Some states follow community property laws, which dictate that all income, debts and assets acquired during the marriage are split 50-50 between the couple. However, in non-community property states, the court must determine a fair and equitable way to divide bills and assets. In those situations, one spouse must prove that he or she should not be responsible for debts incurred by the other.

This is what happened when Chevella Wilson of Winston-Salem, N.C., divorced her husband in 2008. She was faced with the possibility of being left holding the bag for some of the debt that her husband had racked up. To protect herself, she had her divorce attorney draw up a document that stated what debts she had incurred as his wife and what she would pay. Her husband at the time then had to acknowledge that that was true.

While Wilson's husband did acknowledge that the debts were his, some cases may be harder to prove. For example, in a contentious split, the parties might want to make things more difficult for one another and refuse to tell the truth. In other cases, couples might simply not agree about who should be responsible for what.

Dana S. Branham, a Lexington, Ky.-based financial planner with Edward Jones, says many couples she works with have different understandings about who is financially responsible for what. In other cases, one partner is not aware of the amount of debt that has been incurred by the other because the other person controls all of the finances. In that case, does the court hold one party more responsible for the debt just because he or she was the one who managed the couple's money? "I've run into people with no idea about the marital finances," says Branham. "And unfortunately the other person sometimes takes advantage of that."

If a couple sees that they're headed for a split, regardless of whether they end up in divorce court or seeking an annulment, both parties should have an understanding of their entire financial picture and come to an agreement on a plan for taking care of what is owed. It's also a good time for each to reach out to a financial planner to figure out how the split will impact their futures. When you're starting over, you may have less money slotted for retirement than you planned, or, in the case of divorce, more debt than you realized. Couples also often have to go from sharing expenses to paying all of the household bills on their own. "All of that can be a pretty significant financial adjustment," says Branham.

While Kris Humphries' quest for an annulment doesn't seem to be about assets or debt -- rather, he reportedly wants to be released from the prenuptial agreement that currently prevents him from talking about his relationship with Kim Kardashian -- the motion, if granted, would erase the 72-day marriage from existence. Now that's something we could all probably benefit from.