DEBT AND DIVORCE, NOT A HAPPY MARRIAGE

19th August 2020

DIVORCING YOUR SPOUSE IS EASIER THAN DIVORCING YOUR DEBT

Debts - how are they handled on divorce?

Debt in one parties sole name

Part of the divorce process is untangling your financial ties with your ex. Regardless of what you may have agreed between yourselves, or what the matrimonial court may have ordered, the contract between you and your credit card provider and/or loan provider is unchangeable.

Under English law, a debt remains the responsibility of the person whose name the debt is in, regardless of who and how that debt was incurred.

Contractually, you are responsible for any debt that is in YOUR name. Failure to pay a debt can lead to collections and adverse notes on your credit record.

A common situation is where a spouse is a second card holder on the other spouses credit card and freely uses it. Whilst this may not have been an issue during the marriage, once the parties have decided to separate you would be surprised by how many primary card holders then take issue with the second card holder's spending on their account - especially if the second card holder has gone on a spending spree just before the marriage broke down.

How does the matrimonial court deal, with the debts?

Generally debts incurred during the marriage are considered matrimonial debts and, whilst the court can't change legal responsibility for repayment of the debt, it can make compensatory orders; such as an additional lump-sum payment or order a greater share of the marital capital in one parties favour. The court cannot, however order one spouse to pay a third party, so it cannot order a spouse to take over responsibility for the monthly repayments of a debt.

Debts incurred before the marriage and post separation are not normally considered matrimonial debts, HOWEVER, the court may take them into account when dividing the assets. The circumstances of every divorce is different and, therefore, how the court treats the debts in each divorce is different.

Your best bet, to protect your credit record when a credit card or loan is in your sole name, is to ensure the repayments are made in full and on time, regardless of what you may have agreed or a court has ordered. You can always pursue your ex for any non-payment where it was agreed they would pay.

Debt is in your joint names

Where debt is in joint names people assume they can have their name removed if this is what is agreed as part of the divorce financial settlement. This is not the case.

Creditors are highly unlikely to agree to release one person from their contractual obligations where there is an outstanding balance because this reduces their security for the monies owed to them.

To change the debt into one sole name, the person who it is agreed will take on the debt will need to refinance. The new finance discharges (pays off) the old debt and so, in practical terms, it seems as if the the other person has been “released” from the original debt. If the other person cannot refinance then special clauses need to be incorporated into any financial agreement, to protect the person who it was agreed would be “released”.

Impact of divorce on your credit rating/score

Divorce does not directly impact your credit rating. However, if as a result of a divorce, payments are missed or made late then this may affect your credit rating. Also, it would seem your credit score may be negatively impacted if you close your account or remove yourself as an authorised user.

To preserve your credit rating during divorce:

1. Open an individual account BEFORE you close a joint account.

2. Close any joint credit card accounts or remove your ex as a second card holder on any account in your name.

3. Close any individual accounts your ex may have access to.

4. Work with your ex to amicably divide both the assets AND the debts, and agree a practical repayment plan which you both adhere to.

5. Ensure you have protective clauses in any written agreement in case your ex defaults on their part of the agreement.

The court order may assign responsibility for repayment of a debt, but the court order does not override your contractual agreement with your creditors. If your ex does not play fair, then the most effective way to protect your credit rating when you are facing divorce is to pay your creditor on time and then enforce the court order to re-coup the monies you have had to pay out that your ex should have done.

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