Law Office Report - Winter 2009
Debt and Divorce
Attorney Nadine I. DavyDivorce can have devastating financial consequences. During a marriage, you learn to budget based on a “family” income and on “family” debts. After a divorce, income must be stretched to cover expenses related to two residences instead of one. Further, in the eyes of a creditor, any debt incurred during a marriage (“joint debt”) remains the joint responsibility of both parties, even after the divorce.
It is a common misconception that a court in a divorce may 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 joint debt. The creditor is not a party to the divorce action, and therefore the Court has no authority to hold the creditor to the terms of the parties’ divorce judgment. As a result, your finances may be adversely affected for years if you do not carefully protect your rights as part of your divorce and place protections into your divorce agreement.
Dangers
Your ability to qualify for new credit may be affected since any outstanding joint debt will appear on your credit
report, even if your former spouse is current on the debt. Further, a delinquent joint debt may:
- Adversely affect your credit rating and impair your ability to acquire new loans;
- Result in collection efforts and costly court appearances;
- Result in the entry of a judgment against you;
- 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. This is the most effective way to eliminate the debt and prevent future collection issues.Refinance Debt. Joint debts may be refinanced by the party assigned responsibility for payment in the divorce decree. This can often be accomplished by satisfying the debt with a credit card in the responsible party’s name after the divorce. This may be more difficult with larger obligations, such as a mortgage. 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.
Sell Assets. Sell any assets that are encumbered by joint debt and pay off the debt. It is important to remember that transferring the title of the asset into one party’s name does not eliminate the joint responsibility for the debt. If you take your name off of the title, whether the asset is a car or a house, you are losing ownership but not eliminating loan responsibility.
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 not available. Protective language should be inserted in your divorce judgment. Such language allows recourse against a party that fails to pay court-ordered debts, but does not prevent damage to the other party’s credit.