ASSUMPTION OF DEBTS IN A DIVORCE JUDGMENT
by Raymond Pater

I often receive phone calls from someone being pursued by a creditor on debt that a former spouse was to assume in a Judgment of Divorce. The "innocent" spouse thinks that the creditor is bound by the terms of the divorce judgment. Unfortunately, that is not the case as a divorce judgment is not binding upon third-party creditors who were not parties to the divorce.

A divorce judgment will often require one party to assume certain debts, including the assumption of a mortgage on real estate. If a former spouse fails to pay the debt, the creditor has the legal right to pursue the "innocent" spouse for payment. The negotiated judgment is fair only if the former spouse does pay the debt that he or she assumed. The "innocent" spouse would not have negotiated the same terms if he or she had taken into account that the other spouse might default and that the "innocent" spouse is subject to a continued liability. For example, it seems fair if the first spouse receives a $100,000.00 marital home and assumes $50,000.00 in liabilities, while the second spouse receives $50,000.00 in assets. What appears to be a fair settlement; both spouses receiving $50,000.00 in net assets, becomes grossly unfair if the spouse assuming the liabilities fails to pay and the second spouse is pursued by a creditor. The result would be that the first spouse receives the $100,000.00 in assets and leaves the other party with $50,000.00 in assets and being pursued by a creditor for the unpaid $50,000.00 liability.

There are different ways to avoid this possibility. One way is to require the first spouse to refinance the debts so that the first spouse is solely liable on those debts. Creditors will not simply agree to eliminate the financial liability of the second spouse unless the first spouse has the clear ability to pay the debt, based upon their current credit score, that includes an analysis of the debt versus income ratio. Thus, the first spouse may have the best intent to refinance, but is unable to do so. To deal with the possibility that the first spouse is unable or unwilling to refinance, language will typically be included that if the first spouse does not refinance by a certain date, the marital home must be sold and the proceeds applied to the marital debt.

Some judgments include provisions stating that the obligation to pay that debt is reserved as nondischargable spousal support. Unfortunately, that language is not binding upon a Bankruptcy Court and that language may work only if the first spouse believes it to be failproof. In reality, the spouse might be able to obtain a Chapter 13 discharge on the assumed debt, leaving the "innocent" spouse holding the bag. The "innocent" spouse would be required to retain an attorney in the bankruptcy case to demonstrate by an analysis of income and debts that a discharge would be an unfair financial burden on the second spouse.

Parties may also negotiate that the "innocent" spouse assume part of the debt and retain a lien on the marital residence. That again, might be subject to frustration if the first lien is unpaid as the lien of the innocent spouse would likely be a second lien and not have a priority in bankruptcy.

It is important to retain an attorney who is experienced in divorce matters and will insist that a divorce judgment includes terms designed to protect your interest regarding unpaid debts. If you get stuck with such a debt after a divorce, contact an attorney who knows both divorce and collection law.

For an experienced trial lawyer to handle your divorce or family law issues, contact us at 616-396-8890.