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Divorce & Dividing Debt

Novelist Margaret Atwood wrote, “A divorce is like an amputation: You will survive it, but there’s less of you.” Often, there will be less of you financially after a divorce. But beware: You could end up with more debt than you bargained for. How? If you trade an asset to your soon-to-be ex in exchange for them paying debt. It may sound good. (He pays the credit card, and all he wants is the piano, which isn’t worth that much.) But don’t be hasty! You could lose the piano and get stuck with the credit card debt. Here is what you need to know about dividing debt in a divorce.

Unless one person originally signed up for a debt as their separate obligation, an Arizona court generally will divide the debt equally regardless of whose name the debt is in.

Yes. Your divorce agreement does not bind creditors. If the debt was incurred during marriage, a creditor can come after either of you regardless of whose name the debt is in. The only exception is if one of you originally signed for the debt as your separate obligation.

Arizona treats all miles and points earned after marriage as community property and will equally divide them. Make sure to write that into your divorce agreement. Again, it doesn’t matter whose name the account is in.

The short answer is you cannot – at least it won’t be easy. In rare instances, a bank may voluntarily release a spouse from liability. This usually occurs only with a business line of credit where both parties have signed personal guarantees. In that case, the bank may be comfortable enough with relying solely on the credit of the spouse who winds up with the business. It’s worth asking.

The best way to protect yourself is to pay off the debts with community assets prior to the divorce being signed. But we know that is not always possible.

The next best thing is to take some security against an asset your ex is receiving. The basic idea is if your ex doesn’t pay, you take back an asset. This gets complicated, so please check with an attorney if you want to go this route.

Indemnification in an nutshell: If your ex must pay the debt, but the collections company sues you, then your ex must reimburse you (including your costs if the collections company takes you to court). The legal language: Your spouse must pay, indemnify, defend and hold you harmless from the obligation. This doesn’t stop the collections company. It just allows you to sue your ex for any amount you end up paying the creditor.

Hopefully, your ex agreed to indemnify and hold you harmless from the debt (see above). Next, get a judgment against your ex for the amount you are out of pocket. (Remember: record your judgment with the County Recorder.) This makes your judgment public knowledge. Most creditors will think twice about extending credit to someone with an outstanding judgment. The judgment also gives you rights to garnish your ex’s wages, or sell your ex’s allowable assets at a Sheriff’s sale or, at the very least, limit your ex from buying property or incurring more debt before you get paid.

No. You are still on the hook for the mortgage if you sign a deed. But, you no longer own half of the property. That’s not a pretty picture. Do this instead: Require your ex to refinance your home or otherwise convince the bank to remove you from the mortgage with a specified time. In the meantime, make sure your ex pays the mortgage on time (get duplicate statements from the lender to confirm payment). If your ex fails to refinance or is late in making payments, require that the property be sold. That gets you off the hook for the mortgage.

  • Remove your spouse as a signor or impose spending limits: Contact the credit card company to remove your spouse as an authorized user from a credit card account. If you prefer to leave the account open and conceal signs of an impending divorce, consider changing the credit limit.

But what if it is a joint account? If the credit card is a joint account, however, removing your spouse will not be as easy. The credit card company will likely require you to close the account completely after paying the balance in full—and will require consent from both of you to close the account. If you don’t have the cash on hand to pay off the balance, you may want to consider transferring the amount to a balance transfer card in only one person’s name.

  • Periodically, obtain a copy of your credit report: And always do this during a divorce. This may give you valuable information about accounts that your spouse has not told you about.

In one word: PLENTY. Your ex may never pay the debt. The creditor could make you pay the debt. Even if you sue your ex and obtain a judgment, he or she may be judgment proof. Your credit could be ruined. And, the creditor may come take your piano. This is not a happy outcome!

Message from McCarthy Family Law​

McCarthy Family Law is a full service family law firm that services all family law issues. If you are going through a divorce or have questions about filing for divorce, we are here to assist you. Please call us at 520-623-0341 to explore your options. Turning Stress Into Solutions®.