OKlaw4families

Credit - Debt Division and Divorce

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

• 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 garnishment 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.
• 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.
• 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.
• 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.
• 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:

• 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.

Source:  divorcehq.com by Maury D. Beaulier, Esquire

1. Get a copy of your credit report. You are entitled to a free copy every year. Get a copy from each of the major credit bureaus as the information may vary from credit bureau to credit bureau. Go over every detail of the report. If there are items or sections of the report you don't understand then call the credit bureau that you received the report from and ask them to explain it to you.
   
2. If you believe that any of the information on the report is incorrect, notify the credit bureau. They will you send you a form that you must fill out. They will then verify your information with the creditor and send you an update. If you disagree with the outcome you are entitled to add your own statement to the credit report.
   
3. Make sure that your bills are paid on time. If you think you will hurt your spouse by not paying your bills on time during you are absolutely right. The only problem is you will also be hurting yourself. If the account is your name only then you are only hurting yourself. Remember, when you opened your joint credit account you and your spouse became contractually obligated to pay the debt. A divorce decree or property settlement agreement does not change that liability, even if it states that one person is responsible for the debt. If your spouse does not pay the debt the creditor can and most likely will seek payment from you. Your actions of not paying or paying late will remain on your credit report for the next seven years.
   
4. You can place a fraud alert on your credit report. If you are willing to give up the opportunity to get instant credit you can notify both Trans Union and Experian credit bureaus to add a statement to your credit report requesting creditors not approve new accounts without calling you first. This will protect you from people opening credit accounts in your name. Unfortunately, Equifax does allow you to add this statement to your credit report unless you are already the victim of fraud.