One problem people face after going through a dissolution of marriage is figuring out how to support two households with the same income that previously supported one household. Let’s face it, a major source of conflict in marital relationships involves finances. Often times parties to a divorce find themselves in financial hardships and are unable to pay their combined debt obligations during their marriage and/or while their dissolution of marriage is pending. This problem can be compounded after the marriage is dissolved. Not only will the parties need to figure out a way to pay for the debt that they struggled to pay during the marriage, the parties will also need to figure out how they will each afford their own house, utilities, and other day to day expenses that were previously shared. This is an issue that sometimes leads to one or both parties defaulting on debt obligations.
Clients frequently contact me wanting to know whether they are liable for delinquent debt obligations that their ex-spouse was supposed to pay. The typical answer is “it depends.” Most clients are surprised to find out that they may still be liable for a debt obligation even if their ex-spouse was ordered to pay that debt obligation in the marital settlement agreement or judgment. In order to determine whether you may be liable for a debt obligation post-dissolution consider the following questions:
Regarding the first question, it is important to distinguish between primary and secondary liability. Consider this example: Husband and wife take out a loan to buy a car. The lender requires both husband and wife to sign the promissory note. In this example, both the husband and the wife are “primarily liable” for the car loan. Now consider that husband and wife get divorced and husband is ordered to pay the remaining balance for the car loan in the marital settlement agreement or judgment. The husband is now “secondarily liable” for the car loan.
A judge in a divorce proceeding is only in a position to allocate secondary liability for the marital debt obligations. The judge cannot go back and undo or modify the primary liability for the debt obligation. A creditor pursuing a debt obligation is only concerned with primary liability and is not bound by the terms of a marital settlement agreement or judgment when pursuing the debt. Therefore, in the above example, if husband fails to pay the car loan, the creditor can still attempt collection from wife as a result of her being primarily liable for the debt.
Regarding the second question, it is important to realize that there are various ways you might be liable for a debt. For unsecured debt, take credit cards for example, the analysis is essentially determining who is primarily liable for the debt. However, the analysis may be different for other types of debt like secured debt obligations or medical debts.
Consider example #1: Husband and wife buy a house. The lender only requires husband to sign the promissory note. The lender takes a mortgage on the house securing the debt. Now consider that husband and wife get divorced, and husband is ordered to pay the remaining balance on the house loan while wife is granted possession of the house. In this example, husband is both primarily and secondarily liable for the house. If husband fails to make the house payments, the lender will initiate a foreclosure naming both husband and wife. Even though wife may not be primarily or secondarily liable for the promissory note, she is in possession of the house securing the promissory note, and she may be liable to turn over possession of the house to the bank.
Consider example #2: Husband and wife have a child with a medical condition. Now consider that husband and wife get divorced, and husband is ordered to pay all of the outstanding medical bills for the parties’ minor child. The Rights of Married Persons Act, also known as the Family Expense Act, creates joint liability for certain expenses incurred for the family. A family expense is defined as one which contributes to the welfare of the family or maintains its integrity. Therefore, the minor child’s medical provider may pursue collection of the outstanding balance from either parent even if husband was specifically ordered to pay all of the outstanding medical bills in the marital settlement agreement or judgment. It is important to note that liability under the Family Expense Act may continue past the date of the divorce, as a settlement agreement between the parties is not binding on third parties.
Regarding the third question, it is important to review the terms of your marital settlement agreement or judgment for dissolution of marriage. If you find that your ex-spouse has defaulted on court ordered debt obligations, you should look at your marital settlement agreement or judgment for language containing phrases like “hold harmless” or “indemnify” in the section(s) that allocate the debt obligations. If your ex-spouse was ordered to hold you harmless and indemnify you, then he/she may have to reimburse you for any damages incurred for the failure to pay the debt pursuant to the court order.
These are just a few examples of situations where you may be liable for a debt that your ex-spouse was ordered to pay in the marital settlement agreement or judgment. It is best to discuss these issues with your attorney before you enter into a marital settlement agreement to mitigate your potential liability.