Credit - Debt Division and Divorce
Debt Division and Divorce
By Maury D. Beaulier, Esq.
Divorce can have devastating financial consequence. During
a marriage, you learn to budget based on a "family" income and on "family"
debts. Some of the monthly expenses remain constant like mortgages and car loan
payments. After a divorce, that budget changes. Income must now be stretched to
cover expenses related to two residences instead of one. This can be very
difficult, and if proper planning is not provided, it is not uncommon that a
divorce ultimately results in the filing of bankruptcy for each party.
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.
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.
- Even a debt that is current may affect your ability
to qualify for new credit since the outstanding debt will appear on your
How can I avoid these difficulties?
Pay Off Debt.
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
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 partyís name. This may be more difficult with larger
obligations like a homestead mortgage.
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 personís name does not
eliminate responsibility for the debt. If you take your name off of title,
whether the asset is a car or a house, you are removing ownership but not
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 partyís 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;
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different states. Before acting on what you have read, it is important to obtain
appropriate professional advice about your particular situation and facts.
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