When a couple divorces, the value of the marital estate is the difference between the couple's total assets and their total debts. When the net value is a positive number, it may be possible to pay off all of the couple's debts when the divorce is finalized. However, at times a couple will be unable to afford to pay off all of their debts, and at other times they may see an advantage in dividing joint debts along with the marital assets instead of immediately paying them off.
A joint debt may be collected against either or both spouses. If possible, even if other debts are assigned to the party responsible for the debt and its payment, joint debts should be paid off when a divorce is finalized. Even when the spouses agree that one spouse will be responsible for the debt after the divorce is final, that agreement does not affect the rights of the creditor.
While your divorce settlement or judgment is binding upon you and your spouse, it is not binding on third parties. That means that a creditor is not bound by the divorce judgment. If your ex- has agreed to pay a joint debt and fails to do so, the creditor may come after you.
While you have the right to try to enforce the divorce judgment through the divorce court, it takes time and money to enforce a judgment. If your ex- isn't able to pay the debt, trying to enforce it may end up costing you more money that you won't be able to recover from your ex-.
Keep in mind that sometimes a spouse will have the best of intentions at the time of divorce, or even when defaulting, yet be unable to pay joint debts assumed in a divorce. For example, an ex-spouse may experience loss of employment, or a medical condition that is temporarily or permanently disabling. If an ex-spouse passes away before paying off their share of a joint debt, the other spouse will have to try to recover the money from the deceased ex-spouse's estate, with no guarantee that the estate will have sufficient assets to pay the debt.
When one ex-spouse declares bankruptcy, that spouse's debts will be subject to discharge. If the bankrupt spouse files for Chapter 13 bankruptcy, any outstanding joint debts will become tied up in the subsequent repayment plan. Although obligations ordered by the divorce court as part of a property settlement or support order are not discharged, payments or arrears may be made part of the repayment plan.
When a spouse has assumed responsibility for a joint debt as part of a property settlement, or is made responsible for that debt in a divorce judgment, that obligation to the other spouse is not extinguished by bankruptcy. If the non-bankrupt spouse has to pay off such a debt due to the bankrupt spouse's default or bankruptcy, once the bankruptcy stay is lifted it is possible to attempt to recover that money through the family court. Unfortunately, the creditors may pursue the non-bankrupt spouse for the full balance due on the joint debt, and that right is not affected by the question of whether or not it is possible to recover the money through the family court.
If you divorce, you can protect yourself before the divorce is final by taking steps to avoid any increase in joint debts, such as charges made to joint credit cards, by separating your finances from those of your spouse. For example, you can close out joint credit card accounts, and remove your spouse from status as an authorized signer on any sole accounts that you hold. You should discuss any such steps with your divorce lawyer before you take them, as sometimes removing your spouse from a joint account will create undue hardship for that spouse and may anger a divorce court.
What if You Cosigned for Debts
For purposes of protecting yourself, even if a debt is in the name of the other spouse, if you are a cosigner for the debt you should treat that debt as if it is joint. As a cosigner, you will be responsible for the debt if the named borrower defaults and you won't be entitled to any advance notice of late payment or default before the creditor comes after you for payment. You should investigate whether or not you are eligible to be removed as a cosigner, either at the time of divorce or after the divorce is complete, and if possible, remove yourself from that obligation at the earliest possible date.
Protecting Yourself in the Divorce Judgment
If it is not possible to pay off all joint debts in a divorce, or you opt not to do so, you should include a provision in the divorce judgment about the eventual refinancing or resolution of that debt. For example,
If one spouse keeps the marital home and it remains subject to a joint mortgage, the parties may agree that the home must be sold or refinanced within a specified number of years after the divorce is finalized;
If one spouse keeps a vehicle that is subject to a car loan for which both spouses are responsible, the parties may agree that the car must be sold or refinanced within a specified number of years, and may include other provisions such as that if the car loan is not resolved as ordered by the court the other spouse may take possession of the vehicle and sell it.
If other debts are not fully paid off, it is important to verify that any future actions of either party will not result in additional joint obligations. For example, a credit card company may take the position that neither spouse may be removed from the account before the balance is paid off, such that it treats additional, post-divorce charges as joint debts. Any such debts or accounts should be prioritized for payoff or, if possible, should be refinanced as sole debts.
The divorce judgment should include provisions for when debts are to be paid off, and describing the remedies available to the other spouse if a debt is not paid off on time or if the spouse who is responsible for the debt starts missing payments or making late payments.
Spouses should keep in mind that joint debts will affect their ability to obtain future credit, as they remain part of both ex-spouse's debt loads, and that any default or delinquency by the other spouse may appear on both of their credit reports.
When a spouse who is responsible for making a debt misses a payment, or when that spouse fails to pay off a debt or refinance as ordered or agreed, it is important to promptly address the problem with the divorce court. While spouses may allow some latitude for issues such as when the marital home is sold or refinanced, particularly if it is the home of their children and all payments are being made on time, for a joint debt the only way to be fully protected from creditors is to be removed from the debt.