Divorce and Spousal Debt Liability


Spousal debt liability is a subject that is often over looked during divorce, but one that can have serious consequences afterwards. The following question highlights how you can protect some of your assets if you are found liable for your spouse's debts.

Audrey's Question: My husband borrowed large sums of money during our marriage from several different people. I only became aware of these debts when we began divorce proceedings. They were done as verbal agreements. Am I now responsible for 50% of them?

Timothy's Answer: While your husband may be telling the truth about the loans for his business, I would certainly be wary of any debt incurred without proper documentation. Very often when people go through a divorce, one or both parties claim phony business or personal loans in an attempt to hide assets from their spouse. You should consult an attorney immediately regarding your rights.

Verbal contracts can sometimes be enforceable depending on the type of contract it was, the dollar amounts involved and the laws in your state. Your attorney will attempt to determine the nature and term of the supposed liabilities, whether any collateral was pledged against the asset and if the loan was made for personal or business reasons.

If the loans are verified and enforceable in your state, it very well may end up affecting you regardless of the fact you were not aware of the loans. For instance, if you default on a credit obligation and you own a home, a creditor or individual holding a note can put a lien against your house or file a lis pendens (pending lawsuit) which could tie up your home in litigation for years and prevent you from being able to sell your home.

However, if a creditor tries to seize your assets, you may have some level of protection for your assets. A Homestead Declaration is a legal agreement, which if filed, can protect a portion your home’s value from creditors (the amount differs by state). For example, if someone incurred an overwhelming gambling debt, a portion of their home's value would be protected. This way, if a judgment is entered against your husband and his debts are forced to be re-paid, at least your home will be protected. As far as any other assets you may own, unless either of you had structured in advance certain asset protection tools such as family limited partnerships or LLC’s, then all of your assets would be vulnerable to any creditors.

If you end up receiving a settlement from your divorce, you should look into protecting your assets. Having your assets protected will ensure you never have to worry about a situation like this in the future.

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