We all know that marital debt, just like marital assets are split during a divorce. Something not discussed though is the fact that a contract you have with a debtor doesn’t change regardless of who is order to pay which debt.
In other words, if your name is on a car loan or home mortgage you will continue to be held responsible post-divorce for those debts.
Creditors and Marital Debt
The only agreement a creditor has to abide by is the one you signed with them. It doesn’t matter if your final decree of divorce states that your ex is to pay the car loan. That does not release you of your obligation for the loan. It is for this reason that I suggest couples pay off as many debts as possible before filing for a divorce.
If your ex is ordered to pay debts X, Y, and Z and fails to do so a creditor will come after you if your name is also on the loan agreement. That is the most important thing you need to know when it comes to dividing debt during the divorce process.
How About Debt You Weren’t Aware of?
If you live in a community property state you can be held responsible for debt incurred by your spouse even if you were unaware of the debt and did not sign an agreement with a creditor. In other words, in a community property state marital debt is considered joint debt..debt that you are both responsible for. A creditor can come after you for payment of debt you did not create.
To help protect yourself if you live in these states, full financial disclosure is important during settlement negotiations. You should make a detailed list of all account numbers, amounts owed, and who is responsible for each of the debts. Ordering a copy of your credit report can help you get started.
How to Protect Yourself if Your Ex Doesn’t Pay
Let’s say it is decided that the marital debt will be split equally between you and your ex. You are to pay half; he is to pay the other half. What can you do if he doesn’t pay his half and you have to pay to protect your credit rating? You can’t do anything unless you have an indemnity clause added to your divorce settlement agreement during negotiations.
If worded properly an indemnity clause will allow you to take your ex back to court for any money you had to pay as a result of the loan going into default. Consult with your lawyer about this before signing the final papers.
Refinancing Secured Loans
It isn’t uncommon for a divorce attorney to suggest that you have your name removed from the title of a marital home or automobile. DO NOT do this if there is an outstanding loan and your name is on the loan agreement.
You need to insist that any property that is still under a finance agreement be refinanced in your spouse’s name alone. For example, if your ex is going to keep the car and the loan is in both names, your name needs to be removed from the loan and this can only be done if he refinances the loan.
Make sure that there is language in your final decree of divorce that states the property is to be refinanced and the time period in which he is to complete the refinance. There should also be language in your divorce decree that states the consequences to your ex if he does not follow through with refinancing the property. For example, if he remained in the family home and is supposed to refinance the home into his name within 6 months of the divorce and doesn’t do so, the home will be put on the market and sold. Knowing he may lose property to sale can often motivate an ex to do the right thing.
The Bottom Line
A final decree of divorce is nothing more than a promise on a piece of paper. Just because a judge signs it and your ex is ordered to follow it doesn’t mean he will. What you have to do is think of all the possibilities and how to protect yourself in any situation that may arise once you are divorced. To do so you must:
- Pay off as much debt as possible before filing for divorce.
- Make sure you are aware of all debt in his name, your name or both names.
- Add an indemnity clause to your divorce settlement agreement if needed.
- Make sure the debt he is ordered to pay is refinanced