So a person is heading into a divorce and they have some debt that needs dividing up. This post is about some of the very serious and long term issues that can pop up if they're not careful.
Once the divorce papers are filed there's a document called a "Credit Notice" with the divorce papers. This Notice is required to be included in the divorce per Arizona Law (A.R.S. 25-318).
The problem is that it seems like a lot of people don't have a good understanding of what the Credit Notice means. The Notice reads in part:
In your property settlement agreement or decree of dissolution or legal separation, the court may assign responsibility for certain community debts to one spouse or the other. Please be aware that a court order that does this is binding on the spouses only and does not necessarily relieve either of you from your responsibility for these community debts. These debts are matters of contract between both of you and your creditors (such as banks, credit unions, credit card issuers, finance companies, utility companies, medical providers and retailers).
Since your creditors are not parties to this court case, they are not bound by court orders or any agreements you and your spouse reach in this case. On request, the court may impose a lien against the separate property of a spouse to secure payment of debts that the court orders that spouse to pay.
You may want to contact your creditors to discuss your debts as well as the possible effects of your court case on your debts. To assist you in identifying your creditors, you may obtain a copy of your spouse's credit report by making a written request to the court for an order requiring a credit reporting agency to release the report to you. Within thirty days after receipt of a request from a spouse who is party to a dissolution of marriage or legal separation action, which includes the court and case number of the action, creditors are required by law to provide information as to the balance and account status of any debts for which the requesting spouse may be liable to the creditor.
What this means is that the judge in the divorce case:
MAY and WILL make orders telling the husband and wife to do certain things, pay certain bills, or meet certain financial obligations.
CANNOT and WILL NOT make orders telling their creditors what to do such as refinance a debt, remove a name from an account, or release someone from a liability.
So who or what is a creditor? Simple, anyone you or your spouse owe money to. This includes things like your mortgage company, the company that finances your car, your credit card company, your landlord, your utility company, the IRS, and your spouse's sister that loaned you guys $1,000 last year.
Let's take an example:
A couple is getting a divorce and they have three debts:
The first is a credit card with $5,000 owing on it. Only the husband is listed on the account.
The second is a new 30 year home mortgage with $180,000 owing on it. Both the husband and wife are listed on the mortgage.
The third is the wife's school loan with $20,000 owing on it. Only the wife is listed on the loan.
Now this couple has sat down and agreed that they want a divorce. They've discussed and agreed on how they want things divided and eventually present the following agreement to the judge:
That the husband will be assigned the $5,000 in credit card debt and that he will be 100% responsible for it.
That the husband will keep the home. He will also be assigned the $180,000 mortgage debt and that he will be 100% responsible for it.
That the wife will be assigned the $20,000 in student loan debt and that she will be 100% responsible for it.
The judge agrees and signs off on their agreement in their divorce. Seems simple right? Not so fast...
Now the husband is under court order to pay that mortgage and he has to do it. However the problem arises when the wife tries to buy another home or applies for more credit and is denied. She is denied because she still shows that she is owing on a 30 year, $180,000 home mortgage.
The wife goes to the bank holding the mortgage and shows them the divorce decree showing that the judge ordered that she was no longer responsible. The bank officer then regretfully informs her that the bank will not remove her name from the mortgage. Why?
The Court CANNOT and WILL NOT make orders telling creditors (i.e. the bank) what to do such as refinance a debt, remove a name from an account, or release someone from a liability (i.e. remove the wife from the mortgage).
She will still have that 30 year mortgage hanging over her head until the bank decides that they want to refinance her name off of the account, and they often won't. After all, they'd rather have two people owing them money and not just one.