What Happens to Debt When You Get Divorced?
Divorce can be a long and challenging process. You need to make decisions about everything from mundane details to highly-charged topics. That includes debt that you took on jointly with your spouse. Don’t just assume that your divorce will split loans up the way you expect, and take steps to protect yourself from future financial troubles (and stress) down the road.
Divorce Agreement vs. Loan Agreement
First, be aware that your lenders might not necessarily agree with everything you agree to during the divorce process. One spouse may be responsible for repaying certain loans after divorce (even joint debt, such as a car loan applied for by both partners). But that just means they’re supposed to take care of the debt—they might not follow through and make payments.
Who signed the loan agreement? If your name is on a loan—as a borrower or co-signer—you’re 100% responsible for the debt from the lender’s perspective. Even if you’ve divorced and your former spouse agreed to handle the debt, your credit is on the line if your ex defaults, and you’ll also be responsible for late fees and collection costs. Lenders made an agreement with both of you jointly, and unfortunately, your divorce agreement typically doesn’t affect that contract.
Your credit reports: Lenders probably don’t even know when you get divorced, and unfortunately, they are not sympathetic to personal struggles. Changing your address, changing your name, and notifying lenders of your divorce (with the details of your agreement) will not get you off the hook for a loan. Lenders will continue to report loan activity to credit bureaus, which will update your credit reports. Any missed payments will bring down your credit scores.
Put another way, your ex might be legally responsible for the “debt,” but you’re still responsible for the “loan” or the “account” until it’s taken care of.
Protect your Credit
There are only two ways to keep your credit safe after divorce. Discuss these ideas with your attorney before taking any action:
- Get your name off the loan (by refinancing or having your name removed).
- Make sure the lender gets paid.
Removing Yourself From Loans
It’s best to separate yourself from shared loans that your ex is supposed to repay. Even if you trust the other person completely, they could die or become disabled temporarily, and the debt would be back on your shoulders (although life and disability insurance—that you own—could solve that problem).
Most lenders will not simply take your name off a loan after divorce. It’s always possible, and it never hurts to ask, but don’t get your hopes up. The loan was approved counting on both of your incomes and looking at both of your credit histories. In fact, it might’ve been your credit that got the loan approved, which would make lenders even less likely to let you off the hook. If it's a possibility, the lender will probably need to review the remaining borrower's credit and income before removing your name.
Get a New Loan
The most straightforward approach is to pay off any loans in both of your names and replace them with loans in one person’s name. That typically means refinancing your existing loans. For example, you’d get a new car loan or mortgage, and use that loan to pay off your old loan.
Unfortunately, the person responsible for the debt will have to apply—and get approved—on their own. If they don’t have sufficient income and credit, the application will be denied. In those cases, the borrower might be able to pledge additional collateral (for example, using equity in the home to pay off an auto loan). For large loans, such as home loans, this is especially difficult because two incomes are often required to cover the payments.
Another option is to sell whatever you owe money on (with your attorney’s input and approval, of course). Split the proceeds and part ways. It may not be a good time to sell, it might be disruptive for children, and you may not want to sell—but it makes for a clean getaway.
You may even have to sell for less than you owe if your assets have lost value. Upside-down home loans and auto loans may require you to come up with money (instead of collect money at the time of sale), but you’ll be able to put the past behind you. A loss today may help you avoid headaches and financial burdens down the road. Or, it just may be a price you have to pay to move on.
Don’t Assume Anything
The most important thing to do during a divorce is to manage your debts proactively and don’t just assume they’re being paid off. You need to keep an eye on things as long as your name is on the debt, and loans may be around for many years after your divorce.
Make sure you have a way to keep track of loans after your divorce. Get online access to accounts, and make sure lenders have up-to-date contact information so they can send mail to you (whether it’s your new residence, a Post Office box, or another arrangement). Monitor your accounts regularly, and read any correspondence from your lender so that you can avoid defaulting on loans.
If necessary, you can bring legal action against a non-paying ex-spouse—but the alternatives above are probably better. For starters, you don’t want to spend more time or money on legal issues, and if you’re the one paying off debts, it’s often because your ex can’t afford to do so (so legal action won’t do you much good anyway).