How to Separate Your Marital Debt in a Divorce

When going through a divorce, marital debt is split up.  The way you go about it could cause you trouble down the road.

Most often when couples are going through divorce, money is involved – both assets and debt.  The main money focus is on the assets such as the bank accounts and retirement accounts. Don’t overlook your marital debt.  But just like the marital assets are split up in a divorce, so is the marital debt.

Perhaps the biggest myth when dividing up the marital estate revolves around the debts.  It is important knowing how to separate your marital debt effectively to protect your credit.

Marital DebtMyth: A divorce decree can remove a spouse’s liability from a joint liability – such as a mortgage, car payment, or credit card account.

Not true, sorry.

Unfortunately, most people believe that by dividing up the marital debt and spelling it out in the divorce decree, one party is off the hook.  This is simply not true.  You have not been set free from your obligations to your creditor just because your divorce decree separates the marital debts as to each spouse.  In other words, if your name is on a car loan and your ex-spouse is taking the car and ordered to pay the note on it, you are still responsible for the payments.  It is still your obligation.

Truth:  Your financial obligations to creditors does not change as a result of the divorce decree..  You are still obligated, as well as your ex-spouse, for any account in your name.  The terms of the credit contract are between you and the creditor.  If both of you signed this legally binding contract with the creditor then both of you are responsible for the debt.  The divorce decree does not override this contract.

Your divorce decree is binding on you and your spouse, but not the creditor.  Creditors are not part of the divorce process in any way.  They are not required to follow the terms laid out in your agreement.  Any amendment of a contract requires agreement by all parties.  This includes the creditor who loaned you the money.  Unless the contract is amended or paid off entirely, you are still liable for that debt.  You are responsible until it is either satisfied or refinanced.

Texas is a community property state.  In a community property state, property that is acquired during the marriage is considered joint property.  It’s a bit different when it comes to marital debt.  In Texas, the fact you were married and acquired debt in your name only does not, by itself, automatically mean it is “community property.”  And it doesn’t necessarily mean your spouse is liable on that debt.  If one spouse incurs a debt on behalf of the other spouse, or if the debt is for basic living necessities, then both spouses may be held jointly liable.   Even in the debt is only in one spouses name.  But if debt is incurred solely for the management of separate property (property owned prior to the marriage), that debt belongs solely to the named spouse on the account.  Joint debts obviously belong to both parties.

So, what happens if your ex-spouse doesn’t pay the debt?

If your ex-spouse does not keep up the payments of joint credit obligations that were assigned in the divorce decree, you may be in for an ugly surprise.

When your ex-spouse is responsible for paying a marital debt obligation, and does not make the payments, You can be negatively affected.   Your credit as well as your ex’s is affected…just as if you were still married. Expect the late payments to be reported on your credit bureau as well as your former spouse.

You may not be aware your former spouse is not paying the debt, in fact, you probably won’t be.  This means you would not have an opportunity to make a payment to keep your credit in good standing.  And if that’s not tough enough, the delinquency could go on for a time and result in a collection or charge off.  That too would wind up on your credit report.  Negative items on your credit impact your ability to finance a home, possibly rent, your insurance rates, and more.

How do you escape the marital debt trap?

The only way to remove a name on an account is to refinance or pay it off.  This includes your mortgage, auto loans, other installment loans, and credit cards.  In the case of a credit card, a new account would need to be opened.  You would also need to transfer the balance and close the old card.  Read that sentence again…the old card must be closed.

A well thought out settlement agreement will have language dealing with marital debt.  Should a spouse default on a debt, then the divorce decree should have language that will allow you to seek remedies from your ex-spouse in family court.  Keep in mind, this remedy does not sever the responsibility you have to the creditor.  It just requires your ex-spouse to pay you so you can pay the creditor.

Your best option and easiest way to escape the possible nightmare your debts can cause post-divorce is  to pay off the debts.  Allocate community property assets to pay the community debts of each spouse at the time of divorce.  Naturally, this will leave you both with less cash and assets to walk away with (but no debts, hallelujah).  But it allows you to leave with a clean slate and protects you from future risk.

 

Unfortunately, most mortgage professionals and many divorce professionals including attorneys, financial planners, mediators, etc. don’t understand the major positive impact a divorce lending professional can have on the divorcing client’s future need for mortgage financing. As a Certified Divorce Lending Professional, CDLP, my goal is to set up divorcing clients for success. Let your attorney contacts know that there are multiple ways to structure mortgage loans for divorcing couples as well as avoiding the common hurdles and pitfalls. 

 

About Elizabeth Rose

Elizabeth has over 30 years in the financial and mortgage industry. In tune with the mortgage market, she provides refreshing, unrivaled knowledge leveraging expert resources and delivering results.
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