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Divorce, Debt and Credit
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.
DANGERS
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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;
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unpaid joint debt may adversely
affect your credit rating and impair your ability to acquire new
loans;
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An unpaid joint debt may result in
collection efforts and costly court appearances;
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An unpaid joint debt may result in
the entry of a Judgment against you;
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An unpaid joint debt may result in
garnishments or liens.
How can I avoid these
difficulties?
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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.
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Transfer
Debt. 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.
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Sell
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.
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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.
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Include
Protective Language.
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:
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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;
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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;
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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.
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