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 decree will split loans up the way you expect. It’s crucial to take steps to protect yourself from future financial troubles (and stress).
Divorce Agreement vs. Loan Agreement
First, be aware that your lenders might not acknowledge 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 simply means they’re supposed to take care of the debt—they might not follow through with making payments.
Who signed the loan agreement? If your name is listed on a loan—as a borrower or co-signer—you’re 100% responsible for the debt from the lender’s perspective. Even if you're divorced and your former spouse agreed to handle the debt, your credit is on the line if your ex defaults, and you’re also responsible for any late fees and collection costs.
Lenders made an agreement with both of you jointly, and unfortunately, your divorce decree typically doesn’t alter 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 impact your credit reports. Any missed payments will cause a drop in 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 two ways to keep your credit safe after divorce. Discuss these strategies with your attorney before taking any action:
- Get your name off the loan (by refinancing or having your name removed).
- Arrange to pay the lender in full.
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, placing the debt 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 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 have been your credit that expedited the loan approval, which would make lenders even less inclined to let you off the hook. If the lender does consider this possibility, they 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 the funds from that loan to pay off your old loan.
Unfortunately, the person responsible for the debt must 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 the equity in the home to pay off an auto loan).
For large loans, such as home loans, financing is especially difficult because two incomes are often required to cover the payments.
Another option is to sell whatever you owe money on, such as your home or vehicles (with your attorney’s input and approval, of course). Split the proceeds and part ways. It may not be the ideal time to sell, it might be disruptive for children, and it may not be your first choice, but it makes for a clean getaway.
If your assets have decreased in value, you may be forced to sell for less than you owe. Upside-down home loans and auto loans may require you to come up with money (instead of collecting money at the time of sale), but you’ll be able to put the past behind you. Accepting a loss today may help you avoid headaches and financial burdens down the road. Or, it may just 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 never just assume they’re being paid off. You need to keep an eye on loans as long as your name is attached to them, recognizing that loans may be around for many years after your divorce.
Make sure to devise a way of meticulously keeping track of loans after your divorce. Obtain online access to accounts, and make sure lenders have up-to-date contact information so they can send you important mail (whether it’s your new residence, a Post Office box, or another arrangement).
Monitor your accounts regularly, and read any correspondence from your lender to 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 to navigate legal issues, and if you’re the one paying off debts, it’s often because your ex can’t afford to do so. In that case, legal action won’t benefit you much anyway. Besides, most of us would rather avoid legal proceedings if there’s any other way to reach an acceptable resolution.