Thanks to our great economy, dealing with debt is a bigger part of divorce cases. More then ever before, divorcing clients are facing short sales or foreclosure of real estate, bankruptcy, and significant debt load.
During a Massachusetts divorce, what are some of the issues you should consider surrounding joint liabilities? There are many variables to consider, so remember this is just general information. Debts and liabilities fall under the larger umbrella of property distribution. Savvy readers of our website know that property division in Massachusetts must be…..? Anyone? Anyone?
Answer: Equitable! Or fair. But not necessarily equal. But, now back to joint debt.
Generally, there are three main options when dealing with joint debt. For the purposes of this post, by a “joint” debt, I mean that the actual account is in both names.
Option 1 – Pay It Off
Well, that sounds easy. Nice and neat and tidy, too. Paying off debt is probably the best option under many circumstances. Unfortunately, it just is not always possible.
Paying off joint debt, whether with sale of proceeds form the marital home or other assets or with savings provides closure and protects the credit ratings of both spouses. There is also the benefit of leaving the marriage with less debt and making a fresh start and without financial entanglement with your ex. Given that so many couples have trouble because of financial issues, it is certainly a plus to pay-off debt whenever possible.
Option 2 – Split Debt (with each spouse taking some responsibility for some)
If debt cannot be satisfied, debts could be divided so one spouse is responsible for some debt, and other debt is assigned to the other spouse. For example, the wife becomes responsible for paying the Target Visa and the husband agrees to pay the MasterCard.
In this scenario, a person has control over the liabilities they keep, so that in the example above, the husband would know he remembered to pay the MasterCard bill. Unfortunately, there remains a risk to your credit rating if your spouse defaults on the obligations that he or she is responsible for or has agreed to pay. If your spouse doesn’t pay his or her liability per the divorce agreement, he or she would likely be in contempt, BUT the creditors don’t care about that! They want their money and can still come after you for an outstanding debt, even if assigned to your spouse in the divorce agreement.
Option 3 – Continued Shared Responsibility
On the sort-of positive side, like in option 2, you and your spouse do not have to come up with the money to pay off all debt in this scenario. Using the same example as above, perhaps you and your ex or soon to be ex-spouse agree that you will each pay half of the MasterCard balance. This situation still leaves you both exposed to later conflict and damage to your credit rating if one side does not have the funds available to pay their portion.
Other Points to Consider
In the situation where the parties are sharing a debt or debts, or one spouse is taking responsibility for a specific joint liability, then your divorce agreement will normally include an indemnification clause to provide some protection for the spouse that is not responsible for the account per the divorce agreement. If one spouse violates the agreement, then the court may make the defaulting spouse pay the other back, or even possibly cover legal fees. You cannot hold up your divorce agreement as a shield against MasterCard however when a debt is joint.
Summary: Although there may be exceptions, it is probably a good idea to try and pay off as much debt as possible at the time of divorce!
By Stephen McDonough, Esq, Owner of The Divorce Collaborative LLC of Bedford and Franklin, MA.
Divorce attorneys and mediators serving the Concord, Lexington, Billerica, Milford, Norfolk, and Wrentham areas.