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GUEST POST: “Debt Division During Divorce”

By Anselmo Moreno

Today I’ve asked attorney Jeremy Swanson to elaborate on how debts may be handled during a divorce.

“Debt Division During Divorce” | Swanson O’Dell A.P.C.

Jeremy Swanson, Esq.

In a divorce, the judge will not only divide up assets, but also debts. Generally speaking (with some exceptions) any debt incurred during the marriage is community debt. This means that it is split evenly, or else is balanced against other assets. For instance, one party could take a car worth $10,000, and also $10,000 in credit card debt, for a net asset value of zero.

One of the biggest problems with debt division is that although the court can divide all debt between the parties, a family law judge has no authority over the lenders themselves. A bank, credit card company, or other creditor is not bound by any orders of the family law court. If debt is held in joint names, the creditor will probably try to collect the full amount from the person with the higher wages or great assets. They will disregard any order of the family law court for division. This can create real problems when one party does not pay the debt assigned to them. Although the family law court can order the other side to repay the amounts taken from accounts or garnished from wages, this money can be hard to recover if the other side does not have assets. It is often prudent to structure a settlement so that the party who has the means to pay the debts is assigned them, with a balancing against assets awarded to the party.

Another consideration is bankruptcy. What if one party files bankruptcy after the divorce, and the creditor tries to collect the full amount from the other party? This can create a real mess. If a bankruptcy is anticipated, it is usually financially best to file the bankruptcy together, and prior to finishing the divorce, so that the debt is cleared off and discharged before the court makes any orders regarding property division.

Retaining good credit during a divorce can difficult. Often, a professional credit repair company is needed to sort out what credit items are correct, and which are incorrect, and to clean off some of the bad credit items from the divorce. Please see this post from professional Anselmo Moreno, President of Innovative Credit Solutions, for options and ideas for fixing credit after a divorce:

Jeremy’s website and blog can be found at: http://www.swansonodell.com/

DISCLAIMER: All legal principles quoted are valid as of the date of writing in the State of California. However, you should NEVER base your actions on a legal article, blog, or internet story, as facts in real life are complicated. You should have your case evaluated by an attorney experienced in the area of law needed for your case. In addition, there are often exceptions and potential changes to results that occur due to facts that you may think are trivial or unimportant. This article should not be taken in any way as legal advice on your specific legal matter.

NOTICE: This blog and all materials on our website constitute advertisement materials, and the promulgation of such materials is meant for the residents of the State of California only. The attorneys and this firm do not practice law in any other state. In addition, the promulgation of these articles does not in any way create an attorney-client relationship and any inquiries and information you may send to the attorneys should be general and not specific, as they are not confidential.

Protecting Your Credit: During and After a Divorce

By Anselmo Moreno

Debts that are commonly divided in divorce proceedings are typical consumer debts such as mortgages, car loans, and credit cards. These types of consumer credit products are generally credit that is reported to all three major credit bureaus, and which can be a great source of damage and stress post-divorce.

In a divorce decree, the court assigns payment responsibilities to one spouse or the other, but it cannot amend or override the original contract signed by both spouses. In the credit world, this means that if your spouse retains the jointly held car loan or mortgage, it is still a joint account even after the divorce is final. Removing your name from the title or deed does not remove your name from the promissory note or contract.

Here is where it gets messy: your ex-spouse misses a few payments on the loan, and now you have late payment delinquencies reported on your credit reports. This can happen at any moment in time for the life of the loan which can be a very long time if we’re talking mortgages and car loans. The credit score formula will not take the “my ex-spouse is supposed to pay for that” argument into consideration, and neither will your creditors. Your score can drop significantly, often disqualifying you from obtaining a new mortgage or car loan for yourself.

This scenario can happen with any joint financial product that is seen on credit reports. Credit cards are much easier to control because you have the option of closing the account, and they are generally much easier to pay off when compared to a mortgage or car loan.

Can I be removed as a joint loan holder?

Your ex-spouse will have to refinance the loan under their name only. That can become very problematic as negative equity problems could prevent a new bank from refinancing the loan. Perhaps the sole income of your ex-spouse is not enough to qualify for the loan on their own. Or even worse, their credit rating is very low as a result of the divorce.

Protecting your credit:

To protect your credit you would have to terminate your liability with the bank. One option is to sell the house or car and pay off the loan. If that’s not possible, and you find yourself or your ex-spouse unable to refinance the loan, your only real option is to file for Chapter 7 Bankruptcy Protection. This eliminates the possibility of late payments affecting you in the future. As long as your ex-spouse continues to make payments, they get to keep the house or car.

If bankruptcy is not an option for you, the next best thing is to check your credit report and joint accounts once a month to make sure things are being paid on time. As you are still a joint account holder, there is nothing stopping you from calling the bank once a month and checking to see if the payments have been made. If there is a danger of being 30 days late, you at least have the option to protect your credit rating by making the payment yourself and then having your ex-spouse reimburse you. Not the most practical solution, but it works. I often advise clients to do this when they are in the middle of a major purchase, but run the risk of late payments due to jointly held debts which they don’t control.

Knowing how all the moving pieces of credit and debt work during a divorce is important. Having an experienced law firm like the Law Offices of Swanson O’dell can be your best asset when navigating a divorce. Check out a great blog about debts and divorce by attorney Jeremy Swanson.

 

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