What Happens to Debt When You Get Divorced?

Divorce is a tedious and challenging process. It involves a multitude of decisions to be about the mundane to the extraordinary.

A highly debatable aspect of any divorce is the debt that was a joint endeavor between you and your spouse. One must not assume the divorce means splitting the debt according to your liking.

Steps need to be taken for your protection from further financial difficulties and anxieties that you may encounter down the road. 

What Happens to Debt When You Get Divorced?

The Difference Between a Divorce Agreement vs. Loan Agreement

Before we proceed to explain any details, it is essential for you to understand the primary difference between a divorce agreement and loan agreement. You need to be aware that the lenders may not necessarily agree with all the decisions made during the divorce proceedings. In often cases, one of the spouses is given the responsibility for repaying individual loans even if it was a joint debt, a car loan, for instance, that was applied by both the partners. However, being responsible does not necessitate repayment. 

If one is asked to take care of the debt does not mean that they will follow through with the payments despite any financial disputes over the debts.

The Signature On the Loan Agreement

From the perspective of the lender, you are automatically responsible for the debt if your name is on loan as either the borrower or as a co-signer. If you are divorced and your former spouse defaults the loan after agreeing to handle the debt, your credit gets on the line. You shall be responsible for the collection costs and late fees. Lenders make their agreement jointly, and unfortunately, the divorce agreement has no effects on the debt.

Credit Reports

Lenders are usually not informed about your divorce proceedings, and we are sad to say that they are never sympathetic to the personal struggles of the individual. Notifying the lender about the changes in your name and address after the divorce will not get you off the hook. The lender will continue to report the loan activity to a credit bureau, which updates your credit report. Your credit scores will suffer a negative impact if you miss the payments.

In simpler terms, even if your ex had taken the legal responsibility for the debt, you are still responsible for the account or loan, until it has been taken care of.

How to Protect Your Credit

You can keep your credit safe after the divorce by following one of the following two ways. You can discuss the details with your attorney before finalizing the course of action:

1. You have the option of refinancing or getting your name off the loan. Or,
2. Ensure that the lender would receive all of the payments.

Getting Your Name Removed From the Loan

It is ideal for you to separate yourself from all the investments that are due to your former spouse. Despite your absolute trust in your ex, they could suffer from a calamity such as a temporary disability or even death. Those scenarios could bring responsibility for the debt back on your shoulders.

The majority of the lenders would not strike your name off the agreements after the divorce, but there is always a slight possibility. The approval was based on counting the income of both the partners and assessing the credit histories of both, which is why the lenders are even less likely to get you off the hook. The lender would probably need to review the remainder of your income and borrower’s credit before removing your name.

Refinancing

A straightforward route is to pay off the loans taken in both of your names and replace them with the name of a single partner. That would typically mean a total refinancing of current investments. To illustrate with an example, let’s take a look at a car loan. Getting a mortgage or new car loan will help you pay off the previous one.

Unfortunately, the individual responsible for paying off the debt will have to go through the process of application and approval on their own. A lack of sufficient credit or income could lead to denial of the loan application. In such cases, the borrower has the option to pledge additional collateral like paying off an auto loan by using the equity at home. If you need a more jumbo loan, such as one for a home, your stakes get even higher since the availability of two incomes makes it easier to cover payments.

Liquidation of Assets

The next best option is to sell the asset that you owe money for. This would, however, require the approval and input of your attorney. You have the opportunity to split your proceeds and part ways amicably. You may consider not selling the asset as it could be disruptive for children, but this is the cleanest getaway possible.

You might owe more than the selling price of your asset due to the loss of value. Auto loans and upside-down home loans ask you to bring money instead of collecting it at the time of sale. These things are more comfortable to let go of. Suffering a financial loss today saves you from burdens and headaches later in life. 

Perhaps it is the price you need to pay for moving on with your life.

Avoid Assumptions

The most practical thing to do during a divorce proceeding is proactive management of your debt instead of assuming that they would get paid off. You must keep an eye on these details until your name remains on the loans and debt, even long after the divorce has taken place.

Make sure that you have access to documents that allow you to track the loans after your divorce. You can use online services to ensure that the lenders have accurate contact information so that they can stay in touch with you. Regular monitoring of your accounts and reading all correspondence from your lender will help you avoid defaulting on the loan.

Legal Action

When all else fails, you can take legal action against the non-paying spouse. Asking for high court enforcement may seem like a step too far, but it is critical for self-preservation. You may not want to pursue any further legal battles, but a little effort in the present shields you from unwanted financial burdens in the future.

Final Thoughts

There is no denying the fact that getting a divorce is a draining process. You have to undergo a lot by the end of the proceedings. But taking a few steps at the right time is the best way to move forward in your life and drop the baggage before moving on.

---

Alycia Gordan is a freelance writer who loves to read and write articles on healthcare technology, fitness, and lifestyle. She is a tech junkie and divides her time between travel and writing. www.twitter.com/meetalycia