It is a common misconception that a court in a divorce can relieve one party from the financial obligations incurred during the marriage. Although the Court may require one party to pay a joint debt, that ruling does not prevent a creditor from pursuing either party for an unpaid debt. The creditor is not a party to the divorce action. The Court has no authority to modify the terms of the contract that was executed with the creditor.
Even in cases where the parties have an amicable relationship and reach an agreement on the issues, danger lurks. Problems with joint debts are often the result of mistakes and ignorance rather than an intent to harm the other party. As a result, if you aren't careful to protect your rights as part of your divorce and if you do not place protections into a divorce agreement, your finances may be adversely affected for years.
- Even a debt that is current may affect your ability to qualify for new credit since the outstanding debt will appear on your credit report.
- Unpaid joint debt may adversely affect your credit rating and impair your ability to acquire new loans.
- An unpaid joint debt may result in collection efforts and costly court appearances.
- An unpaid joint debt may result in the entry of a Judgment against you.
- An unpaid joint debt may result in garnishments or liens.
How can I avoid these difficulties?
- Pay Off Debt. Any joint debts should be paid off. This is the most practical and bullet proof solution. If the parties do not have the liquid resources to pay off existing joint debts, they may wish to consider selling other assets or tapping into other financial resources to settle the debt. Obviously, this is the most effective way to eliminate the debt and prevent future collection issues.
- Transfer Debt. Joint debts may be divided by transferring the debt solely into the name of the party responsible. This can often be accomplished by satisfying the debt with a credit card in that party’s name. This may be more difficult with larger obligations like a homestead mortgage.
- Sell Assets. Sell any assets that are encumbered by a joint security interest. This specifically includes real estate. It is important to remember that transferring the title of the asset into one person’s name does not eliminate responsibility for the debt. If you take your name off of a title, whether the asset is a car or a house, you are removing ownership but not loan responsibility.
- Refinance the Debt. Have one spouse refinance the home in his/her own name. If one spouse is going to keep the house, you should insist upon new financing. The mortgage company will not simply remove one party from the responsibility for the loan. As with any new financing, the party seeking to refinance will be required to qualify financially. Often, the financial impact of the divorce may make qualifying difficult. In such cases, it may be possible to find a relative willing to co-sign on the new loan.
- Include Protective Language. Clearly, the best way to resolve joint debt issues is to eliminate the debt or the joint nature of the debt. Sometimes, however, those options are impractical. In such cases, you must be very careful to place protective language into the divorce agreement or to specifically request protective language from the Court at trial. This is a last resort and an imperfect way to resolve joint debt issues. Often, protective language allows recourse against a party that fails to pay court ordered debts, but does not prevent damage to other party’s credit. The language used must be carefully crafted to comply with state and federal law. Any omission may result in language that is unenforceable and ineffective.
Protective language may include:
- Requiring the party obligated on the joint secured debt to remain current and in the event that a payment is not made in a timely matter, require that the secured asset be placed immediately on the market for sale.
- Allowing the party that is not obligated to make payment on any delinquent debt in order to protect his/her credit rating and to seek reimbursement in addition to interest and attorney’s fees from the other party.
- Establishing the allocation of joint debts as an integral part of the financial settlement and support payments in the divorce proceeding which renders the debts non-dischargeable in bankruptcy.