Without proper guidance, divorce proceedings can quickly deteriorate into a sticky and emotional mess leading to costly mistakes later on. For many divorcing couples, immediate attention is given to divvying up any assets that they had previously owned together. But the truth is that properly dividing and assigning any outstanding debts through the divorce proceedings is just as important (if not more so) then asset distribution. By not paying attention to these financial obligations it opens the door to future misunderstandings, continued, unpleasant contact with an ex-spouse, further court proceedings, ruined credit, and even financial abuse.
To help get the divorcing couple started off in the right direction, the following article provides general information on the process of handling outstanding financial obligations in divorce. Divorcing couples should keep in mind, however, that a qualified professional should be consulted to hash out the details of each specific case.
Understanding the Role of Divorce Court When Dividing Debts
The main thing that divorcing couples must be aware of when going through proceedings is that the divorce court decree is a contract solely between the spouses. The court does not actually have any jurisdiction over existing contracts with lenders, and the assignment will only be legally binding upon the lender's approval.
This means that any creditor may pursue the spouse who is most capable of repaying the debt. So even if the court decrees that one spouse is supposed to pay off a particular bill, the creditor can come after the other spouse to collect. Moreover, if a jointly held account remains active, one spouse can add more debt and leave the other one to cover it.
Steps a Divorcing Couple Should Take to Assign Financial Obligations
- Determine the financial situation. The first step for divorcing couples is to get a clear and accurate picture of their finances to help ensure that both assets and debts are handled properly in court. To that end, the couple should gather any bills, financial statements, and appraisals.
- Get a credit report. An up-to-date credit report will provide vital information about the couple's economic situation including the status of each credit account, when it was opened (or closed), and whether the responsibility is individual or joint. A credit report will also provide a detailed payment history of each debt as well as the names and addresses creditors have on file. Every American has the right to receive one free credit report a year from each of the three major credit bureaus. To get their credit reports, the divorcing couple should go to annualcreditreport.com.
- Separate and resolve any accounts. To save a lot of headache (and heartache) later on, all lenders should be notified of the impending divorce, where possible all joint accounts should be canceled, and the remaining financial obligations should be properly paid off and/or divided between the spouses. At the end of this process, each spouse should have a totally separate list of debts for which he or she has sole responsibility. The couple should consider liquidating assets at this time to take care of some or all of these joint obligations.
- Declare a joint bankruptcy. In cases where one spouse is considering filing for bankruptcy before the divorce has been finalized, the couple may want to file together. Since creditors are not legally bound by the divorce decree, if one spouse files for bankruptcy alone then he or she may be legally released from paying certain debts, while the other spouse will be held liable for the entire amount due. Both partners should be aware that filing for a joint bankruptcy is usually not an option for couples who are already divorced- even where the debt is jointly held.
- Add an indemnity clause to the divorce. Where one spouse will be responsible for a joint debt after the divorce has been finalized, it is a good idea to add an indemnity clause to the settlement agreement. An indemnity clause provides a measure of protection to the other spouse in case the financial obligation is not properly met. The spouse who is responsible for the debt can then be taken back to court in order to make restitution or face fines and jail time.
In short, with a little planning and foresight a divorcing couple can successfully divide their debts and thereby avoid having to clean up a sticky mess later on.