Divorce usually requires the division of the debts of the marriage along with the assets.
The legalese usually requires each party to indemnify and hold harmless the other from the debts assigned to that party.
Most folks skim over that provision to worry about the division of assets or support issues or the termination of their status as married people.
But that may be a mistake.
Long after the personal property that was divided has worn out and the need for support has passed, the right to indemnification may live on.
Given the length of some statutes of limitation and an industry selling and collecting on time barred debt, the obligation to indemnify your ex may live longer than the marriage.
So, what’s indemnification all about?
Indemnification creates a new debt
First, let’s define indemnify. It means to make someone whole should they suffer a particular kind of loss.
In the case of a divorce, a right to indemnity would require one spouse to pay all the damages inflicted on the other by reason of a debt assigned to the other spouse.
Example: Suppose there’s a joint credit card and the liability is assigned to Husband. If he fails to pay the debt, and the creditor sues Wife to collect, the right of indemnity gives the Wife who had to pay the debt the right to sue Husband, who is required to make good everything she had to pay to the creditor.
At the heart of the matter is the fact that the division of debts between the spouses doesn’t alter the collection rights of other entities not party to the divorce. Put another way, the divorce judgment can’t change a contract the spouses made with a third party.
The divorce can only create a new obligation between the spouses: if the spouse who was assigned the debt doesn’t pay, and the other spouse has to pay because of the preexisting liability on a contract, the spouse who was assigned the debt now has to pay the other spouse.
Debt to ex spouse not dischargeable in 7
Once you recognize that the language in a divorce judgment about indemnification creates a debt between the spouses, you start to see the bankruptcy implications.
Bankruptcy law provides that no debts between spouses arising from a divorce can be discharged in Chapter 7. Those non support debts between spouses can be discharged in Chapter 13.
Nothing keeps an ex spouse from discharging the obligation to the creditor in a Chapter 7. The discharge just doesn’t relieve the debtor from any obligation to indemnify the ex spouse should the creditor collect the assigned debt.
Four tips to avoid that debt
In a perfect world, each spouse would be both capable and willing to pay the debts assigned to them. But the world is less than perfect.
If you’ve just had to pay a debt assigned to your ex, a chance to sue your ex to make good your loss isn’t very satisfying. Better than the alternative, but still not great.
Recognizing the long time line on indemnification rights, it’s worth trying to your exposure to rights of indemnification.
In the course of the divorce, consider these approaches:
- Pay off joint debts to the extent possible
- File a joint bankruptcy so that neither spouse is liable on joint debts
- Divide debts as nearly as possible in line with the legal liability for the debt
- Provide that the right to indemnification is an element of support one spouse owes the other
Alone, or in tandem, these approaches can simplify your life going forward.