Marital Debt: Who’s Responsible and How Can You Avoid Getting Screwed?
You may be excited to receive a portion of your marital assets when you divorce. But did you know you will also be responsible for sharing the debt you both incurred before your divorce when you were married? “But what if I didn’t know about it?” you ask. “Or wasn’t the one who took out the loan or wracked up the credit card?” The answer is, if your name is on the accounts, what you and your spouse agree to verbally or in writing may not matter. Creditors won’t care what promises you made to each other about how much debt you planned on assuming. The only promise creditors will care about is the one you made to them when you signed their promissory note or added your name to their account. Married or divorced, you’re going to have to pay. That is unless you take a few precautions before divorcing. 1. Find out how much debt you’re actually talking about. If you weren’t the one writing the checks out for the bills during your marriage, don’t panic just yet. The good news is, in the electronic age we live in, finding what you owe is relatively easy, beginning with ordering your credit report so you can see what accounts have your name on them individually and jointly. Ask your spouse to do the same, so you can share information. It’s important to note that in community property states, even if one of your names is on the account or loan, each of you may still be held responsible for paying. The key is to get as much information at the outset as you can. 2. Don’t rush to pay off your debts while you’re still married. You may feel tempted to divide and conquer your bills before heading to the lawyers, thinking that doing so will make the divorce process quicker, easier, and less painful. But depending on how you or your spouse incurred the debt and what weight you each carried during the marriage for earning income, you may not need to share equally in paying it. Wait for your lawyer to advocate for your position and negotiate how you will settle your share. Sometimes debts can be offset against assets or deferred until a later date. Plus, despite your investigative work, you may not have all the facts concerning your finances, more of which your lawyers can uncover during discovery. 3. Remove your name from accounts you share. Before you sign your divorce agreement, make sure you divvy up the accounts you each have in your name, remove your name from those accounts you share, and add your name to those you agree to assume. Beware though; when it comes to certain types of loans, such as a mortgage, home equity line of credit, or car loan, removing your name isn’t enough to set you free. 4. Refinance your loans. When dealing with loan types such as the ones I mentioned above, removing your name is usually not sufficient or even possible without refinancing the loan altogether. When it comes to refinancing a mortgage, for example, you will likely be required to have your home reappraised, which can either increase or decrease the funds you receive from your assets at distribution. That new value may be a potential point around which to negotiate how much debt you and your spouse owe, further underscoring why you should wait to pay off marital debts until you see your full financial picture. 5. Put an indemnity clause in your divorce agreement. It’s not unusual that I have clients come to me post-judgment to enforce terms the terms of their divorce agreement because their spouse is refusing to comply. Non-compliance can occur when a spouse agrees to pay off a particular debt and then doesn’t, potentially leaving you responsible (especially if you haven’t taken the precautions I suggested earlier). To prevent you from being held accountable, your attorney can add an indemnity clause in your divorce agreement. An indemnity clause will allow you to sue your ex-spouse later if they fail to pay, an incentive for them to make good on any promises they made to you during your divorce, even if they failed to keep the ones they made to you during your marriage. PHOTO CREDIT: GOT CREDIT DEBT KEY VIA PHOTOPIN (LICENSE)