The following information about divorce and auto loan responsibility can help you understand what your options are when dividing marital assets and debts.
Many people who get divorced are shocked to find out they can still be held responsible for their ex’s debts after the divorce is finalized. For example, if you and your ex both signed for a vehicle loan during the marriage, the creditor will hold both of you liable even if your divorce decree specifies your ex is responsible for the debt. This is because creditors are not party to divorce proceedings and the only agreement they have to comply with is the one you signed with them.
Another instance where you could be held liable for your ex’s debts is if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin). In these state, both spouses remain responsible for the repayment of any debt acquired during the marriage, regardless of what the divorce decree says. Unfortunately, creditors can even come after you for debts that you didn’t know about. This is why it is so important to get full financial disclosure during your divorce.
So, what options do you have to get out from under any ongoing debt responsibility after divorce? Generally, the auto loan should go to the spouse who retains ownership of the vehicle. If your ex has a good enough credit score and was awarded the car in your divorce, refinancing the loan in his name can remove your liability for the loan. Another option is to pay off the loan with money from a cash settlement in your divorce.
On the other hand, if neither of you wants to retain ownership of the vehicle, it might make more sense to sell the vehicle and pay off the loan. The worst thing to do is let the loan go into default and have the vehicle repossessed. This will damage the credit scores for both of you.
Below the financial expert gives his input on how to handle auto loan issues after divorce.