||Debt in Divorce,
Credit cards and divorce, Marital debt, property divisions
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.
- Even a debt that is current may affect your
ability to qualify for new credit since the outstanding debt will
appear on your credit report;
- 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.
How can I avoid these difficulties?
Pay Off Debt.
Any 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 collection issues.
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
party’s name. This may be more difficult with larger obligations
like a homestead mortgage.
Assets. 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 person’s 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 loan responsibility.
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.
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 party’s 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;
- allowing the party that is not
obligated to make payment on any delinquent debt in order to protect
his/her credit rating and to seek reimbursement in addition to
interest and attorney’s fees from the other party;
- establishing the allocation of joint
debts as an integral part of the financial settlement and support
payments in the divorce proceeding which renders the debts
non-dischargeable in bankruptcy.
legal representation in Western Wisconsin or Minnesota call 612.240.8005
Call (612) 240.8005
Minnesota Divorce Issues
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