Managing shared debt in a divorce

Managing shared debt in a divorce

On Behalf of | Sep 21, 2020 | Firm News |

Regardless of how cooperative or how adversarial two people are when their marriage ends, the process of determining their property division agreement may be quite difficult.

In addition to splitting or assigning ownership of their shared assets, spouses must also decide what to do with or how to assign responsibility for their shared debts.

Debt repayment prior to divorce

One option some couples employ is to pay off shared debt before getting divorced. This may simplify some decisions in their negotiations but may not always be possible.

Debt responsibility per divorce agreement

As explained by Bankrate, relying on a divorce decree alone to outline the terms of joint debt liability after the divorce may not provide sufficient protection for the party who does not need to repay debt. When a joint credit or loan account remains intact with both spouses’ names, the creditor may continue to view both parties as responsible for the debt even when their divorce decree assigns responsibility to one person only.

Transferring the debt to an account held only in one person’s name removes the other spouse from liability. This then provides protection for the non-responsible spouse from credit collection efforts or negative reports to credit bureaus should the other person miss any payments or make any late payments.

Mortgage responsibility when keeping the house

The Mortgage Reports indicates the same concept applies to home loans in that a divorce decree alone does not remove financial responsibility for a mortgage in the eyes of the lender. This holds true even when the parties signed a quit claim deed assigning full property ownership to one person.