Photo (cc) by Mr Thinktank
This week we feature an all-too-common problem: When couples go their separate ways, but their shared debt doesn’t.
Here’s this week’s question:
Good Afternoon Mr. Johnson,
In my divorce my ex was awarded a motor home. I don’t drive and agreed it should be his. I was only on the loan because it was building my credit and helping him and he was ALWAYS good at paying bills on time, monthly, so I wasn’t worried. Unfortunately, he had a stroke and didn’t have the means to cover his medical bills because he no longer had insurance. So he claimed bankruptcy and among the debts included was the motor home. Since my name was still on the loan, they are now coming after me for the remainder. Is there any way to fix this or is it a case of pay it or have bad credit?
Before we consider Rhonda’s options, let’s look at this motor home loan from the perspective of the parties involved. Because obligations like debt can look different depending on who’s doing the looking.
How Rhonda probably sees this debt
When you’re standing in the shoes of an ex-spouse, debts like this must seem indefensible.
Rhonda doesn’t own the motor home, doesn’t even drive, and only put her name on it in the first place to build her credit and help her normally dependable ex-husband. Why should she have to repay the debt? To make matters worse, the one who should be paying the debt — her ex — has now been absolved of paying it by a bankruptcy court.
So because she was doing someone a favor, she’s now on the hook. And because she pays her bills on time, she can’t even petition a bankruptcy court for help.
In what world is that fair?
How Rhonda’s lender probably sees this debt
When you’re standing in the shoes of a lender, going after Rhonda is totally defensible.
When Rhonda and her husband applied for this loan, they both agreed to be individually responsible for the entire debt. They didn’t say they’d stop paying if one or both of them no longer liked the motor home. They didn’t sign anything saying one could get off the hook if they got divorced, or one signed their ownership over to the other.
What they said, in writing, was that they were both fully liable for the entire debt, come hell or high water.
And now, here it is: hell and high water.
Both points of view are understandable. Unfortunately for Rhonda, however, the only view that matters — the one a court would recognize — is the lender’s.
It’s important to remember that although you’re free to merge ownership of just about anything — married or not — your credit is your own. There’s no such thing as joint credit histories. When you sign your name on the dotted line, you’re obligated. The only way to remove yourself from a joint debt is to remove the debt, either by paying it off, selling the asset and using the proceeds to pay it off, or refinancing it in the other person’s name.
When I got divorced years ago, I took the house, along with the mortgage. But the divorce specified I had 18 months to get my ex’s name off the loan. That left me with three choices: sell the house and pay off the mortgage, pay off the mortgage from savings, or refinance the mortgage in my name alone.
It gets worse… or maybe better
While it was impossible for Rhonda to predict the lousy outcome that’s befallen her, one could at least argue she knew what she was getting into. After all, she did sign the loan paperwork. But there are some situations where she could be liable for marital debts she didn’t agree to, or even know about.
In Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — community property states — a spouse can be liable for debts entered into by the other spouse during the marriage, even if they were unaware of them. In these states, debts entered into during the marriage are considered community debts, and both spouses can be liable.
However, if only one spouse files Chapter 7 bankruptcy in a community property state, community debts could also be wiped out.
In the rest of the country, if you don’t sign, you don’t owe, married or not.
That’s the general rule, but laws vary by state. Rhonda should check out the details for herself by reading articles like this one from Nolo.com; it has lots of good info and isn’t hard to understand.
Another great idea is to talk to a consumer lawyer. Initial consultations are generally free, and she’ll probably get the information she needs in a few minutes.
What should Rhonda do?
What Rhonda obviously should have done when she got divorced is to make sure that when her husband got the motor home, he got the full debt that went with it. That apparently isn’t what happened, though. What now?
If the motor home still exists and has not been repossessed and sold by the lender, her ex should sell it and apply the proceeds to the debt.
I suspect, however, the motor home has already been sold and the debt left over is what remains unsatisfied. Since her ex’s debt has presumably been discharged in bankruptcy, she’s left holding the bag alone.
If a lawyer assures her that’s the case, what she might attempt is negotiating the debt with the lender. In other words, offering to pay a discounted amount to satisfy the debt in full. She should also specify that, along with the payment, any and all negative remarks from this debt be removed from her credit history. (See Ask Stacy: Can You Help Me Clean Up My Credit History?)
A consumer lawyer might also help her with this negotiation.
The moral of the story
Rhonda wasn’t being irresponsible. Sometimes stuff just happens – stuff you can’t foresee. That’s life.
The one thing to take away from this story is to be careful when you borrow and when you support other people’s loans. When it comes to cosigning, don’t do it, or at least have your eyes fully open if you do. Don’t ever sign loan documents just to be nice. Be aware that bad things, like strokes, happen, and even those with the best intentions can unintentionally leave you in a lurch.
The bottom line? The less you obligate yourself to lenders by either borrowing or helping other people borrow, the less likely you’ll end up in trouble some day.
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I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.