When a husband and wife divorce, their divorce decree typically specifies which marital debts each party is responsible to pay. The divorce judge has the authority to order this division of debts as between the husband and the wife. As to creditors who are not parties to the divorce case, however, the allocation of debts in the divorce decree is meaningless. The divorce decree does not prevent the creditors from pursuing collection of the marital debts from either or both parties, regardless of the orders contained in the decree.
Here is an example to illustrate this principle. During their marriage, Husband and Wife open a joint Visa credit card, a Mastercard, and an American Express Card. They also buy a vehicle together on a loan from GMAC. At the time they divorce, they owe $6,000 on their Visa, $4,000 on their Mastercard, and $2,000 on their American Express. They owe $15,000 to GMAC on their vehicle, which is worth only about $12,000. The judge awards Husband the vehicle and the debt on it. The judge also orders Husband to pay the Visa. The judge orders Wife to pay the Mastercard and the American Express.
After the divorce decree is entered, Wife diligently makes the monthly payments on the Mastercard and American Express. A year later, however, she starts receiving calls from GMAC and Visa. She finds that Husband defaulted on his vehicle loan and that the vehicle was reposessed and sold at auction for $3,000 less than the debt owed. Including collection costs, interest and late fees, $4,000 is now owed to GMAC, and GMAC wants to collect the money from her. She finds that Husband never made a payment on the Visa after the divorce and that with interest and late fees, $7,000 is now owed on the Visa. The Visa people also wish to collect from her. In total, the creditors are now coming after wife for $11,000 on top of the $6,000 she was ordered to pay in the divorce.
Wife protests that she doesn’t owe GMAC or Visa anything — that Husband was ordered in the divorce to pay those debts. Is Wife’s argument valid? No. With a few limited exceptions, debts incurred during a marriage are community debts. Such debts are owed to the creditors by both the husband and the wife. A creditor’s rights can only be affected by a lawsuit to which that creditor is a party. A divorce judge cannot adjudicate the rights of a creditor who is not a party to the divorce case. An allocation of debts in a divorce decree has no impact on creditors’ contractual rights to pursue collection of unpaid debts.
So in my example above, is Wife simply out of luck? Maybe. If Wife ends up paying Visa or GMAC anything on the debts Husband was supposed to pay, Wife can bring an enforcement action against Husband back in the family court. In short, Wife can sue Husband for the amounts she paid on the debts Husband was ordered to pay, and she will likely be awarded a judgment against Husband. Obtaining a judgment and collecting on it, however, are two different things entirely. If GMAC and Visa found it difficult to collect from Husband, Wife probably will too.
The best way and time to deal with this issue is by settlement before the divorce is finalized. By negotiation, the parties may agree to liquidate certain assets and pay off joint debts. Another option is for each party, while the divorce is in process, to open new credit cards and to balance transfer 50% of the joint credit card debt (or other percentage as the parties agree) to each party’s separate credit cards. Neither party will be responsible later for any debt the other incurred after the divorce case was filed and served. Finally, the parties can agree to include debt refinance requirements in their settlement papers.
Copyright © 2012 by Scoresby Family Law – J. Kyle Scoresby, P.C. All rights reserved.