Debts of the marriage often outlive the marriage itself.
And, those left-over debts are nothing but trouble.
But too often, divorcing couples don’t mop up the joint debts they held during the marriage, only to have the situation blows up years later when one ex-spouse hits financial trouble.
Here’s a true story that illustrates the danger.
Joint account remained open after divorce
When the client arrived in my office
- divorce has been final for decades.
- no balance on joint line of credit when the spouses divorced
- no one closed the account
When my client hit a rough patch, she accessed the left-over line of credit, big time. But it wasn’t enough to avoid the need for bankruptcy.
As a result, my client’s financial mess threatens to slop over to the former spouse who remained liable on the dormant line of credit, because no one paid attention to the debts at the time of the divorce.
Even though the new balance on the line of credit arose long after the divorce, the ex spouse remains liable to the lender because his name is on the account.
Chapter 7 doesn’t discharge debts to spouses
My client can discharge the debt to the lender in her bankruptcy, but not the debt to the long-since ex spouse. That’s because obligations between spouses, such as the division of debt, can’t be discharged in Chapter 7
I see a couple of possible outcomes in my case:
The indemnification clause in the divorce agreement will require my client to make the ex whole.
The other spouse’s reported efforts to close the account will serve to insulate him from the debt.
In the face of the bankruptcy, the lender will not pursue the uninvolved ex.
Deal with debts of marriage up front
It’s early days on this particular episode. But the broader lesson is clear: clean up all joint financial matters during the divorce.
Every joint obligation left for untangling later is a ticking time bomb. Leaving a refinance, a property transfer, or a joint account for “later” exposes one ex spouse to the debts and financial travails of the other.
Former spouses got a big bump in their protections from consequences of bankruptcy filings by their ex’s in the bankruptcy “reform” act of 2005. Now, no debt created by a divorce is dischargeable in a Chapter 7.
So the obligations created by an agreement to indemnify or hold harmless the other spouse from debts will survive Chapter 7.
But the value of that indemnification right may be questionable if the person required to protect the other former spouse has just gone through bankruptcy. If the protected spouse has to pay the lender, the only remedy is to sue the ex, who just went through bankruptcy.
So, clean up the debt situation in the divorce, just as thoroughly as you divide the assets.
More on bankruptcy and divorce
Image courtesy of Fort Meade.