Divorce involves splitting your marital assets, but it also means dividing your marital debt. When it comes to your car loan and divorce, make sure your property settlement agreement spells out what to do with your loan.
Let’s say you want to keep the car for yourself—or your spouse wants it. The prudent thing to do is to have the loan refinanced. This is more complicated than simply removing your spouse’s name from the loan agreement. Your loan company will make you go through the financing process all over again, providing documents that help prove you can make the payments with your income alone (if you can’t you can ask someone to co-sign with you). If your spouse is the one who wants the car, it’s still important to refinance the vehicle even if your name is off the title. If your name stays on the loan agreement, you are as legally responsible as he/she is for any payments. To avoid any confusion about who is to pay what, you can ask the court to include a statement in your divorce agreement that your ex is to refinance the car loan in his/her name within a certain period of time. What’s more, ask the financing company to send a duplicate monthly statement to you as well as to your spouse to make sure payments are current. This is especially important in community property states like Nevada, California, Texas and Wisconsin. In these states both spouses hold ownership of marital property and marital debt—regardless of whose name is on what loan or title—until a judge signs off on it and makes it legally binding. So even though you may have informally worked out with your spouse that he/she will make the car payments, if payments are missed you are as liable as your spouse for the debt.
If refinancing isn’t possible—say, neither of you can afford the payments alone—another good option is to sell the car outright. Selling the car may prove a better financial move than risking default on your loan payments, a death knell for your credit rating.
Perhaps you need to keep the car to get to and from your job or to get the kids around, but you know you can’t make the loan payments alone—now what? One option is what the courts call a “set-off agreement.” Here, your spouse will be responsible for the car payments in lieu of making some other (monetarily equivalent) payment, like child support or alimony.
Both you and your spouse can take money—either saved separately or acquired through the selling of marital assets like a home—and pay off the loan. For example, let’s say that the loan amount remaining is $10,000. You and your spouse pay the money to clear the loan and then agree to sell the car for its blue book value, dividing the proceeds. Or, one or the other of you can take ownership of the car and pay the fair amount for it to your ex.
Your spouse was supposed to refinance the car and get your name off the loan agreement six months ago, but never did. Now you’re getting delinquent notices from the financing company. What’s your recourse? Take your ex to court. While a judge can’t salvage your now-tainted credit rating or prevent the loan company from demanding payment, the courts can order that your ex reimburse you for any payments you made to keep the car from being repossessed.
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