Why Your Divorce Decree Does Not Bind Your Creditors

Dividing debt in a divorce can feel straightforward. You make a list of the credit cards, car loans, mortgage, and other obligations. Then you decide who will pay each debt. Or, the judge decides for you. Once that decision appears in the Judgment and Decree, you might think the issue has been settled.

Between you and your former spouse, it is. But the creditor may see things differently.

Although the divorce court can divide responsibility for a debt between spouses, it generally cannot change the contract that either spouse signed with a bank, mortgage company, credit-card issuer, or other creditor. That difference between joint debt in divorce and sole debt can create an unpleasant surprise after the decree has been issued.

Key Takeaways

• A divorce decree binds the spouses in divorce, not creditors. The court can assign responsibility for a debt between you and your spouse in divorce, but it can't rewrite the actual contract either of you signed with a bank or lender.
• A creditor can come after whichever spouse's name is on the agreement if a spouse fails to make payments for a debt, regardless of what the divorce decree says.
• Marriage alone doesn’t make a debt jointly held between the spouses. What matters is which spouse’s name is on the paperwork.

Your Divorce Decree Governs You and Your Former Spouse

Suppose a husband and wife jointly signed for a credit card. Their divorce decree awards the debt to the husband and orders him to pay it. Six months later, he stopped making payments.

The wife may reasonably believe that the credit-card company must pursue him because the decree says the debt is his. Unfortunately, the credit-card company was not a party to the divorce and is not bound by that division of responsibility. If the wife signed the credit agreement, the creditor may still pursue her.

The divorce decree gives the wife rights against her former husband. It does not automatically take away the creditor’s contractual rights against her in cases involving joint debt in divorce.

What Joint and Several Liability Means

This phrase sounds technical, but the concept is simple. When two people are jointly and severally liable for a debt, each can be held responsible for the entire unpaid balance. It does not mean that the creditor must collect 50% from each person.

For example, imagine that a divorcing couple jointly owes $12,000 on a line of credit. Their decree requires each spouse to pay $6,000. If one spouse fails to pay, the creditor may be able to seek the entire unpaid balance from the other spouse. The creditor does not have to follow the 50/50 division in the divorce decree.

Minnesota law recognizes this principle for joint contractual obligations. Under Minnesota Statutes section 548.20, parties who are jointly liable on a contract may also be held separately liable for the full amount.

That is why simply writing “Husband shall pay the Visa” or “Wife shall pay the car loan” may not provide enough protection from joint debt in divorce when both names remain on the account.

Being Married Does Not Make Every Debt Joint

There is another important point that must be clarified: a debt is not automatically a joint debt merely because it arose during the marriage.

Under Minnesota Statutes section 519.05, one spouse is generally not liable to a creditor for the other spouse’s debt. The family court may still allocate that debt between the spouses as part of the divorce, but that is different from determining who is contractually liable to the creditor.

The documents matter. It’s important to consider the following questions when determining whether a debt is joint or belongs only to one spouse:

• Did both spouses sign the loan?
• Is the credit card truly a joint account?
• Was one spouse only an authorized user?
• Who signed the promissory note?
• Whose name appears on the mortgage?

Critically, an authorized user on a credit card is generally different from a joint account holder. An authorized user may have permission to use the card without having signed an agreement to repay the debt. Before negotiating the debt division, it is important to determine the actual legal relationship each spouse has with the creditor.

The House as a Common and Costly Example of Dividing Joint Debt in Divorce

The same problem frequently arises with a home.

The divorce decree may award the house to one spouse. The other spouse may sign a quitclaim deed transferring their ownership interest. But it’s critical to understand that signing away ownership does not remove that spouse’s name from the mortgage.

A deed determines ownership of the property. The mortgage and promissory note determine responsibility for the loan. Unless the mortgage is refinanced, paid off, or the lender formally releases a borrower, both borrowers may remain liable for the joint debt in divorce even though only one of them owns or lives in the house.

This is why a good divorce agreement should address more than who receives the home. It should also include a realistic deadline for refinancing or selling it, and explain what happens if refinancing is denied or not completed on time.

The same reasoning applies to a jointly financed vehicle. Transferring the title does not necessarily remove a borrower from the car loan.

What Happens If Your Former Spouse Does Not Pay the Creditor?

If your name remains on a joint debt and your former spouse misses payments, the creditor may report the late payments, contact you for payment, file a collection action, or pursue other remedies allowed by law. Your credit can be damaged even though the divorce decree assigned the debt to your former spouse.

You may need to make payments to protect your credit or prevent repossession or foreclosure. If you pay a debt that your former spouse was ordered to pay, you may then ask the family court to enforce the Judgment and Decree and require reimbursement. Keep the decree, creditor statements, payment confirmations, correspondence, and other proof of what occurred.

That remedy is important. However, it comes after the problem has already reached you. It is much better to reduce the risk before the divorce is final. For more information on your case, contact Mundahl Law today for a consultation.