Divorce Agreement vs Loan Agreement
First, be aware that anything you agree to during divorce is not necessarily agreed to by your lenders. It’s common for one spouse to be responsible for repaying debt after divorce (even joint debt, such as a mortgage applied for by both husband and wife). However, that person may not actually follow through and make payments.
If your name is on a loan -- as a borrower or co-signer -- you’re responsible for the debt. Even if you’ve divorced and your former spouse agreed to handle the debt, your credit is on the line. Lenders made an agreement with both of you jointly, and unfortunately that agreement is not affected by anything in your divorce agreement.
Ultimately, this means that your credit is still on the line; debt and divorce are completely separate issues. If your name is on a loan, your credit will suffer if payments are not made on time and as agreed. Even though you’re not supposed to be responsible for coming up with the money, your credit is still tied to the loan or account (and any activity or lack of activity on the account). Your marriage may be over, but the debt lives on.
What can you do to protect yourself?
Get a New Loan
The best way to manage debt in divorce is to get rid of any joint loans. Put debt in the name of the person responsible for paying it. If your former spouse is supposed to pay the auto loans, those loans should be in that person’s name only.
Unfortunately, you can’t just remove your name from a loan. Well, you can always ask, but it’s unlikely that your lender will accommodate your request. If they just let you off the hook, there’s nobody else to go after if your former spouse fails to pay.
Getting loans into one person’s name requires refinancing. The person responsible for the debt after divorce should apply -- individually -- for a new loan that’ll replace the existing loan. This is the cleanest way to do things, but it can be difficult.
Any refinance will have to be approved by a lender. That means the person applying for the loan needs to have sufficient income to repay the loan and strong credit. In some cases, such as a home purchase, the individual may not earn enough money to get approved (that’s why a lot of mortgages, which tend to have relatively high monthly payments, are applied for jointly).
If you can’t refinance debt as you go through divorce, you’ll have to take another route.
Another option is to sell whatever you owe money on (with your local attorney’s input, of course). Split the proceeds and part ways. It may not be a good time to sell, 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 asset is worth less than you owe. Upside-down home loans and auto loans may require you to come up with money (instead of collect money) 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 divorce is to manage your debts proactively. Don’t assume they’re being paid off, even if your former spouse promised to take care of everything. You should 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 your lenders have a way to contact you regarding your account. Again, your credit is at risk so it doesn’t make sense to count on your former spouse. Problems can come up for a variety of reasons -- even dependable people miss payments and hit rough patches.
If your ex misses a payment or contacts you to renegotiate, contact your attorney immediately. With input from a local expert, you can make an informed decision about what steps to take.
Learn more about what to do with loans as you divorce.