Joint Debt: Don’t Put it Out of Sight, Out of Mind Until It’s Paid in Full

It’s one of the most misunderstood areas of the law for divorcing spouses. So this bears repeating.

When it comes to debts, family court can only make orders as to and as between the spouses. Family court cannot enter orders which bind third party creditors.

So when the family court allocates a joint debt to one spouse, that does not absolve the other spouse of their legal obligations to creditors. It just creates an obligation from one spouse to the other.

If the spouse to whom a joint debt is allocated doesn’t pay it, the credit of both spouses will take a hit … and the creditor can pursue payment from the other spouse, who thought they were off the hook.

Now that spouse can still take their ex back to family court to enforce the allocation of the debt and obtain an order for reimbursement. But that does not affect the creditor’s rights.

It is sometimes possible for one spouse to have their name removed from a debt at the time of the divorce, but that isn’t typical, especially for non-mortgage, unsecured debt.

In the case of property buyouts by one spouse of the other, a refinancing of the mortgage can be utilized to take the “bought out” spouse’s name off the note and mortgage. The refinancing is essentially a new transaction for new “compensation” to the lender, and the lender re-underwrites the modified loan to satisfy itself that the soon-to-be-single spouse can carry the modified obligation.

But, with unsecured debts, creditors have little incentive to release a spouse from a debt and give up a potential source of payment. So they likely won’t do so.

Whereever possible, it is always “cleanest” to pay off joint debt and replace it with individual debt in the sole name of the spouse to whom the debt is allocated. Unfortunately though, that is often not feasible.

Moral of the story: no matter what is stated in a marital settlement agreement or ordered by a divorce court, neither spouse is free of joint debt until it is paid in full and discharged.

Read more in this El Paso Inc. news article: Debt and divorce decrees.