First Person: Till Debt Do Us Part

Debt and Divorce

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"I am not responsible for paying the mortgage. My ex is, and it states that in the divorce decree." This is a cry that I have heard more times than I care to remember.

When people go through a divorce they make the mistake of believing that the separation papers are binding on the rest of the world, and that is far from the truth. Without attempting to be a legal eagle, I think that the best term to describe a divorce decree might be a divorce contract. That term that might make the parties realize that the document is only between them, the two ex-spouses.

Let us step back and look at the financial situation of an average couple. They each have their own income, they own property jointly such as a home, they own property separately such as a 401(k) or IRA, owe money on a mortgage that is listed under both names and they have credit card debt issued where both people signed the applications. The couple has always filed a tax return as married filing jointly.

This couple realizes that marriage no longer works for them and they decide to get divorced. There are no children involved and, while they are not on the best of speaking terms, the anger has not escalated to that portrayed in The War of the Roses, a classic movie depicting divorce at its worst.

Mary, the wife wants to keep the house that has no equity and it is agreed that she will be solely responsible for paying the balance of the mortgage and all property taxes. They owe $20,000 in credit card debt and they owe the IRS $12,000 in back taxes. The husband Frank has an IRA which is roughly equivalent to the value of the wife's 401(k) and they agree that each will keep their own retirement assets. The wife agrees to be responsible for $12,000 of the credit card debt and the entire IRS tax bill provided that the husband accepts responsibility for $8,000 of the credit card debt. All that is stipulated in the divorce papers that are signed by each party, their respective attorneys and finally the judge. The marriage is dissolved and everyone believes that they are free of each other.

Six months down the road we find that the financial picture is more entwined than separate. Mary has not made a mortgage payment for 4 months, paid only $4,000 of the credit card debt and has totally ignored the IRS. Frank, on the other hand, sent the credit card company a check for $8,000 a few days after the divorce was finalized.

Frank applied for a credit card and was rejected. His score was only 550 and he thought that was a mistake. It had always been in the mid 700s. He obtained a copy of the credit report and it noted all the late mortgage payments.

Frank contacted the mortgage company and explained to them that Mary was responsible for payment of the mortgage as per the divorce. The response he received back was for him to collect the money from Mary. As per the loan documentation Frank signed, he was responsible for making 100% of the loan payments. In other words he is not relieved of any duty to pay the mortgage despite the divorce decree.

Frank will also find that unless Mary does pay the IRS debt that he may well be liable for 100% of the back taxes, interest and penalty. If Frank can prove that he qualifies under the Innocent Spouse doctrine the IRS may offer him some reduction but the criteria are rather strict and qualification is not assured.

Do not make the mistake of confusing the assignment of responsibility to pay a debt with its discharge.

If you are leaving a marriage and there will be any outstanding debt make sure that you understand the conditions of the decree and that you carefully monitor the debt in question.

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