A concern that has come up a lot lately is how unpaid debts are handled during and after divorce. For example, let’s say a couple has several joint debts acquired
during their marriage: typical debts might include credit card balances, a home loan, and some medical debt. These debts can be paid off from cash available or assets sold during the divorce, or they can be assigned to one of the parties to the divorce.
During the divorce proceedings, the divorcing couple agrees how to pay off debt or assign particular debts and assets to each person, or if they can’t agree, a judge will make those decisions. Once the divorce is final, according to the specifics in the divorce decree, each person is responsible to: 1. Pay off the debt assigned to them, 2. Continue to make the monthly payments, or 3. Refinance the debt out of joint names and into their own name. There are times when only one spouse, who has more financial resources, is assigned all the debt, or a spouse may be assigned more property to offset their taking more debt.
Here are some important factors to be aware of around debt (joint financial obligations) that does not get paid off before the divorce is final:
- The divorce decree DOES NOT override contract law. This means that since the creditors of you and your ex-spouse (ex) were not involved in the divorce proceedings, and have not agreed to release one of you from the debt, you are BOTH still on the hook for all the jointly owed debts.
- You remain legally responsible for the debt until your ex manages to get the debt transferred into their name alone or pays it off. Until that time, if they make any late payments, those late payments will appear on your credit report. If they stop paying or declare bankruptcy and the unpaid debt still has your name on it, the creditor can pursue you for payment of the entire balance owed.
- It is difficult to force an ex-spouse to pay the bills for joint debt once the divorce is final, regardless of what the divorce decree says about assigned debt. If your ex does not pay the debts assigned to him/her, the creditor can take legal action to force payment, and if your name is still on the debt…. see #2. To preserve your credit you have the option to pay the debt if your ex won’t, and you can pursue legal remedies against your ex, but it can be challenging.
So, make sure you talk to your lawyer about the alternatives to deal with the risk of debt not being paid or transferred following a divorce. Some options: use assets from the marriage to pay off the debt before the divorce is final, or require that joint debts are transferred, refinanced or sold before the divorce is finalized. If there are not enough assets or resources to address debts, discuss additional options with an attorney(s).