Debt and Divorce
Debt and divorce often go hand in hand. It can often be more complicated dividing up debts that have been incurred during the marriage than separating assets. More importantly, relying on your soon-to-be-ex to pay debts that appear on your credit report can have long-term, negative ramifications if things turn nasty, as a lower credit score will cause you to pay a higher interest rate or be denied for financing entirely.
Here is some information on the most common forms of debts, along with issues to be aware of when addressing marital debt.
Divorce Debt – Mortgages
Mortgages are usually the biggest debt owed by a divorcing couple. Depending on what the intention is with the marital residence, the mortgage secured by the residence may have to be refinanced from joint name into one parties’ individual name. This can often be tricky given the income requirements to obtain financing, and the negative impact to your credit score that is often a result of going through a divorce. Discussing your options with a mortgage broker before entering into an agreement to take over the mortgage would be a sensible option.
Divorce Debt – Credit Card Debt
Credit card debt is ubiquitous, and is often one of the factors that leads to a divorce. Credit card accounts in joint names are presumed to be marital in nature, and will be split evenly between the parties. Credit card accounts in one parties’ name only are presumed to be the separate debt of that party, and will not be split. These presumptions can be challenged, but will require a thorough review of the credit card statements, as well as any proof showing what the debt was incurred to buy. If you are concerned about credit card debt incurred during the marriage, it would be sensible to start gathering these statements and other proof before speaking with an attorney.
Divorce Debt – Car Loans
Car loans generally become the responsibility of whoever is taking the car associated with the loan. If you are driving a car with a loan that is in your spouse’s name, you should look to refinance the loan to avoid any complications that could arise from non-payment of the loan.
Divorce Debt – Student Loans
Student loans will remain the obligation of whoever incurred them to fund their education. Payments made towards those student loans during the marriage from joint funds cannot be recouped. Student loans incurred to pay for your children’s education should be split between you and your spouse, in proportion to your respective incomes.
Divorce Debt – Automatic Restraining Orders
Automatic restraining orders come into effect at the start of a divorce action. Amongst other restrictions, these restraining orders prevent either party from incurring “unreasonable debts”. This includes borrowing against a home equity line of credit, using credit cards “unreasonably” or taking cash advances against credit cards. There is an exemption for debt incurred to pay ordinary household expenses or to pay reasonable counsel fees in connection with the divorce. These Automatic restraining orders also address issues beyond debts, and also prevent parties from emptying bank accounts and retirement assets, removing the other spouse from health insurance plans or car insurance policies, with violations of these Orders punishable by contempt.
Divorce Debt – Collection Efforts By Creditors
Any agreement reached during a divorce as to who will be responsible to pay marital debts that remain in joint name will not alter the terms of any contract you may have entered into with creditors. Creditors can and will continue to seek payment from any person legally responsible for the debt, notwithstanding the terms of your agreement with your spouse. This is why it is important to transfer debt into the responsible parties’ name as part of the divorce.
Divorce Debt – Bankruptcy
If one spouse finds themselves unable to repay the debts in their name, they may decide to file for bankruptcy. This has a number of effects upon the other spouse, including an automatic stay which will stop any legal action against the person who filed for bankruptcy, including the divorce itself, from proceeding.
This is not intended to be legal advice. You should contact an attorney for advice regarding your specific situation.
Martin Butcher is senior counsel with the firm and practices Matrimonial and Family Law.
He can be reached by phone at 866-303-9595 toll free or 845-764-9656 and by email.