As the Tennessean reported in this article, a common problem people have during their divorce is dividing their debts along with their assets. In my opinion, there are few mistakes you can make that are larger than sharing debt with your former spouse after your divorce is final.
The trap of shared debt
The Tennessean article focuses on the effect of continuing to share a debt on a house after a divorce which is a common problem, particularly after the mortgage business crashed. Lawyers are increasingly finding themselves involved in cases where married people are wanting a divorce, but neither party can afford to keep the house on their own, and the house won’t sell in the current market.
A lot of people believe that all that needs to happen is the spouse who is leaving the house simply needs to sign a quitclaim deed, and they’re no longer responsible for the home. However, in reality all a quitclaim deed does is release your ownership claim upon a piece of property, it does not affect the debt. When you sign a mortgage (or any other loan) you are signing a contract with the bank to repay money over a period of time, and the bank doesn’t care if you’re divorced or not, they want their payments.
In other words, you no longer own the property, but you still must purchase it from the bank so your former spouse can enjoy it. That kind of sucks, doesn’t it?
This same principle applies to any other debt that you might share with your spouse: car loans, boat loans, credit cards, etc.
Marital debt gets worse
If divorce doesn’t have enough nasty surprises, consider this: The easy way out in a divorce is for the two parties to negotiate and agree that the husband will pay certain debts, and the wife will pay certain other debts. Each party will agree and promise to not only pay their debts as pledged, but will reimburse the other party if they are required to pay anything on the debt.
After you have got your divorce and you walk out of the courthouse looking forward to bigger and brighter things, you soon discover your former spouse has run off to bankruptcy court and turned his back on all of the debts he promised to pay. Can you guess what happens next? Yes, all those banks will come looking for you to pick up all the payments he had promised to pay.
OK, but you have documents where he agreed that he was required to pay the debts and he would pay you back if you had to pay them, right? Do you know what the divorce court will do to help you with this? Nothing!
When a person files for bankruptcy protection, the federal bankruptcy court will issue an order preventing anybody from trying to force the bankrupt individual from paying any of his debts. That includes you and the family law court. You’re stuck paying the debt and your divorce documents are worthless.
The way to prevent these problems should be fairly obvious: Do not share debt with your former spouse. Whoever wants to keep the house needs to obtain a new loan, which will relieve the spouse who is moving out of any responsibility on the debt. If the person who wants to keep the house can’t qualify for a loan, they need to either find a cosigner, or the house will have to be sold.
The same applies to all the other debts. Close the credit card accounts. Refinance the cars. Split up everything and make a clean break.
This issue is so serious that at the beginning of this year it became mandatory that all final decrees in divorce cases contain a statement advising the parties that the divorce decree does not affect creditor’s rights to proceed against a party, even though that party is not responsible for the debt under the decree for divorce.
The solution to this problem is simple, but execution can be difficult. Many couples are so burdened with debt that they may have a difficult time moving the obligations into their own name. This issue can become even more complicated when the debt involves tax obligations or business interests held by the parties.
If your situation sounds like any of the above, you would benefit from the advice of an experienced attorney who can help you find and divide the marital debts. Contact me to find out how I can help you free yourself from your spouse and some of the debt.