Car Loans And Divorce

Posted on Thursday, January 29th, 2009
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1. How should a divorcing couple deal with a joint car loan debt?

One of the themes of my web site is to emphasize that a divorcing couple’s problems are not over once the divorce is official. In my experience the “real divorce” entails enforcing the terms of the judgment of divorce. Collecting child support and alimony can be a tireless and daunting task. Many former wives are flooded with unending motions to reduce or terminate alimony. Forcing the sale of the marital home can take years. Forcing a former spouse to pay a credit card debt can be similar to trying to find peace in the Middle East. Many divorced couples can’t wait to be separated. They are thrilled with the prospect of not having to deal with their ex-spouse anymore. Unfortunately, joint financial obligations often make this goal unreachable. Joint car loans often tie disgruntled spouses together for years even after the divorce is effectuated. It is always important to pay particular detail to any joint car loans in any divorce case. The payment of joint car loans should be addressed with particular detail in any property settlement agreement.

The best course of action is to try to sell the vehicle. If possible make sure that the vehicle is sold before the divorce is finalized. If you just have an agreement to sell, you are still responsible for the payments and your credit is in jeopardy. If the vehicle still has payments due, then it is better to sell the car at a loss than risk ruining your credit. Unfortunately, selling the vehicle is not always a feasible option in a divorce case. If a vehicle is sold then how are the kids going to be taken to their baseball practice, their karate classes, or to their ballet classes. Unfortunately, the best and most practical solution in most divorce cases are not feasible given the high cost of living in the “Garden State.” How can people survive here when it costs $10 just to get onto the beach!

The second best option is to have one spouse refinance the car in his or her own name. If one spouse is to keep the car after the divorce, before you get divorced, then insist that your soon-to-be-ex obtain new financing in his or her own name. You can’t just call up the car finance company and ask for one or the other to be removed from the loan. Your bank is going to insist on having him or her go through the formal loan process to qualify. If he or she is not able to qualify for financing on his or her own, maybe a relative can cosign for them.

Don’t take your name off the title. If you take your name off of title, then you are removing ownership but not loan responsibility, and you will place yourself in a very dangerous situation. Yes, this means that you will not be able to split the equity in the car at the present time. Place a limit on how long your ex-spouse can have possession of the car before it has to be sold or refinanced. Also notify the car finance company of your change of address and have all statements sent to your new address. At the very least, inform them that you wish to be notified if the payments get in arrears. In this way, if your ex-spouse is late on payments, you will be notified and you can get the chance to make up the payments.

In my experience it is also very difficult to refinance a car loan in a divorce situation. The process of effectuating an auto refinance loan requires that the parties have to cooperate. In most instances it is impossible even to have the divorcing spouses stay in the same room together without an incident of domestic violence occurring.

The most practical solution is to use a set-off arrangement to insure that the car loan is paid off. This type of arrangement can also protect your credit rating. If a divorced husband has to pay both alimony and child support, and if he and his former spouse have a joint car loan, then the husband should try to work out an agreement wherein he pays the car loan payment in lieu of his support payments. Basically, the husband can pay the car loan payment directly, and he can receive a credit toward his support obligations.

2. The divorce judgment specifies that I am relieved of the joint car loan. However, I have been receiving collection letters from Ford Motor Credit. Should I pay for the joint car loan if my ex-spouse refuses to?

When two people apply for joint credit to purchase a car, and to apply for a car loan, they sign a legal agreement to the auto finance company or to the bank that they agree to pay back the debt. If one spouse can’t pay, then the other spouse is responsible. A family court cannot overturn the contract between the spouses unless it is fraudulent or unlawful. A divorce will not invalidate or void an auto loan agreement.

A divorce judgment cannot relieve a spouse from the financial obligations of a joint car loan. The reason for this harsh rule is because both spouses have signed a legally binding contract with the car finance company, and the divorce judgment does not amend this contract. An amendment to the car loan requires the agreement of all of the parties including the auto finance company. The proof of the amendment requires the signature of all of the parties. During the divorce, the auto finance company is not even consulted, let alone a part of the divorce courts, and therefore the original auto loan stands. Consequently, if your ex-spouse does not pay the auto loan that was assigned to him or her in the divorce judgment, then you are responsible for it.

In summary, regardless of what the court says, or what the divorce judgment specifies, if you signed a car loan contract to be responsible for the payments, then you are still legally responsible for making sure that the payments the being made. Moreover, if the car loan payments are stopped, then the lenders can sue you as well.

In closing, the reality of the divorce battlefield is that divorces are unpleasant and frequently involve ugly legal wars. It is very common that the credit reports of both spouses will become trashed because of the failure to keep up with car loans. This doesn’t have to happen but it does take some effort on the behalf of both parties to avoid it.

3. The divorce judgment provides that my ex-wife was supposed to pay the monthly car loan payment to Honda Financial. I have just reviewed my credit report and it has been “nuked” because my ex-wife has missed five payments, and because the Honda Accord was just recently repossessed. Does my divorce judgment protect my credit rating from being ruined?

If you have a joint car loan financial obligation with your ex-spouse, and if your divorce judgment provides that your ex-spouse is responsible, and if your ex-spouse is delinquent on paying, your credit as well as hers is affected. Your legal responsibility for a car loan debt does not go away because a divorce judgment assigns responsibility for a debt to your ex-spouse. Along with the legal responsibility to pay comes the right of the creditor to report a car loan debt as delinquent on your credit report if it is not paid as agreed in the original contract.

An especially tragic situation occurs when one ex-spouse files for bankruptcy and includes many joint debts and the car loan debt in the bankruptcy. The spouse who did not file for bankruptcy is left holding the bag for the entire car loan. Many times the “innocent” spouse is not even notified of the ex-spouse’s bankruptcy filing until months or years down the road when it is too late to correct the situation. So not only is the spouse who didn’t file the bankruptcy responsible for the unpaid car loan, (and can be legally sued for them), but the non-filing bankruptcy spouse’s credit is also ruined.

4. What can I do to protect myself if my spouse files for a bankruptcy?

In many divorce cases there are two or more car loans that are outstanding. The car loans are assigned to each spouse in the property settlement agreement. After a divorce it is common for one spouse to file for bankruptcy and to wipe out his or her responsibility for the car debt. Thereafter, in many cases the unsuspecting “innocent” spouse will then be sued for the car loan debt even if the divorce judgment did not assign this debt to him or her. To protect against this potential catastrophe it is always advisable to insert clauses into a property settlement agreement or a divorce judgment that limits the impact of a bankruptcy. Clauses can be put into a property settlement agreement that will give a spouse a right to reopen a case if a spouse has filed for a bankruptcy. Some sample clauses are as follows:

Sample Bankruptcy Proof Clause A

In the event of the declaration of bankruptcy by the Wife or Husband, then, in that event, said party shall continue to remain personally liable to the other for any and all expenses incurred by that other party in the connection with the defense of any suit instituted by a creditor or in connection with the payment of any monies to a said creditor. It is the intention of the parties that any bankruptcy filed should be effective as against the creditor but shall not be intended to act to the financial detriment of the other spouse. The parties further agree that in the event a financial detriment to the other spouse is encountered as a result of the bankruptcy laws, then any provisions regarding equitable distribution and/or alimony shall be modified as to compensate the aggrieved party for the financial loss.

Sample Bankruptcy Proof Clause B

It is the intent of the parties that the obligations assumed by each in this Agreement, including any and all indemnifications, shall not be dischargeable in any future bankruptcy proceeding. The parties recognize that the support and equitable distribution provisions are interrelated; in the event one party is called upon to make payment on a debt, or fails to make payment to the other of an asset, as provided herein, such a circumstance would be considered a significant change in circumstance, warranting an application for a modification of the support provisions provided for herein, as well as a redistribution of assets and liabilities in order to effectuate the overall intent of this Agreement. As a result of the interrelationship between the support and equitable distribution provisions of this agreement, it is the intent of the parties to consider the payment of debts and transfer of assets, including indemnifications, to be in the nature of alimony, support or maintenance for purpose of interpretation under the bankruptcy code. Moreover, the parties acknowledge that the benefit to the defaulting party of discharge of any obligations hereunder in any future bankruptcy proceeding will not outweigh the detrimental consequences to the no-defaulting party. As a result, it is the intent of the parties that the obligations assumed hereunder shall not be discharge able in any future bankruptcy proceeding.

5. My husband filed for bankruptcy and he wiped off his car loan debt that we were jointly responsible for. The car loan company is now suing me. What can I do?

Under New Jersey Law, the courts have continuing jurisdiction to review awards of alimony and child support and may increase or decrease such awards where the parties’ circumstances have changed.

The post-divorce bankruptcy of a spouse is a change in circumstances that may warrant a modification of a prior alimony award. More likely, it will be the non-debtor spouse who makes the Lepis application because the bankruptcy has diminished the amount paid to the non-debtor spouse as equitable distribution and because the discharge of the debtor spouse leaves more money available to distribute as alimony or child support.

In simpler terms, the non-debtor wife can file a motion with the family court, and request that the alimony, child support, and the terms of divorce settlement be reconsidered because of the bankruptcy. This type of application is commonly referred to as a Lepis application. In most cases a family court judge will sympathize with the so-called “innocent spouse.” Accordingly, the family court will then increase any child support or spousal support to correct this inequity.

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