Q: A longtime friend and I moved in together a few years ago to co-parent our kids. We each share custody with our exes but have the kids with us most of the time. It makes for a busy house, but they all get along most of the time and we’re our own little Brady Bunch. Eventually our platonic relationship of convenience became romantic. We’ve now decided that we want to make it official and while all the kids support that, my fiancé’s ex-wife does not. She stopped making payments on her car loan and now my fiancé was told he has to pay. It’s her car, they are divorced; I don’t understand. ~Brittney
A: Blending families is never easy. It comes with balancing school and custody schedules, combining finances, establishing a household routine for cooking, cleaning, and laundry, carving out meaningful time with the kids, and protecting the precious time available for romance — it’s a lot for two people to manage successfully. Kudos to you for creating a happy, busy home; the last thing you need is financial interference from a former spouse.
Who is responsible for joint debt in a divorce?
When a couple gets divorced, the result is a legal agreement that ends their marriage, but it doesn’t change the legal agreement two borrowers have with a lender. Unfortunately, joint debt can survive a divorce and rear its ugly head when you least expect it. When a debt has co-borrowers and they are either joint, or one has cosigned for the other, each borrower is 100 per cent responsible for the full amount owing. This protects the lender and allows them to collect payments from either borrower.
When Is “Joint Debt” Not Really Joint?
How can you separate a joint debt?
To separate a joint or cosigned debt, one borrower must qualify on their own merits and submit a new application to their lender for the remaining balance owing. If the loan is for a secured debt, such as a car loan where the vehicle has been pledged as security, the borrower must own the collateral. This means that if one ex-spouse gets the vehicle in the divorce agreement, the other won’t be able to qualify for a secured loan using that vehicle. If that new loan is approved for the single borrower, the funds will be used to pay off the joint/cosigned loan, which will then be closed. The balance owing becomes the sole responsibility of the new, single borrower. This applies to other forms of credit, like credit cards and mortgages, as well.
How to Deal With and Avoid Joint Debt Problems
What happens to your credit rating if your ex doesn’t pay?
When a former spouse stops making the agreed upon payments on a joint debt, it unfortunately affects each borrower’s credit rating because both borrowers are equally responsible for the debt. In the case of an ex struggling to make payments on a joint car loan, it might not seem fair to expect the co-borrower to pick up the slack. However, as tempting as it is to dig in your heels and let the other person default, this impacts you as well.
A negative notation on your credit report could impact renewing your mortgage, result in higher interest rates when you apply for a new loan or line of credit, cause a landlord to pass over your rental application, or in more extreme cases, cause a lender to lower the credit limit on your credit cards or overdraft protection.
What is the Cost of Having a Bad Credit Rating?
Options when stuck paying a joint debt
When you are no longer responsible for making a specific payment, it can be hard to add it back into your budget and resume payments. However, it is in your best interest to find a way to keep the payments up to date if your name is on the loan agreement and the other borrower is not living up to their responsibilities.
This could include redrafting your budget and finding ways to reduce your spending or increase your overall household income to come up with money to make the payment. If you have access to a line of credit at a reasonable interest rate, it could be worth using it to make the loan payment while you explore all of your options. That way you won’t fall behind and receive a late payment notation on your credit report. If you anticipate paying the full remaining balance owing without help from the co-borrower, refinancing your mortgage or applying for a consolidation loan could be options as well.
Is It a Good Idea to Cosign for Someone?
If it’s a secured loan, the security could be sold — such as the car — and the proceeds of sale could be applied against the loan. Depending on your relationship with your co-borrower, this can be a difficult conversation to have and will require a degree of co-operation. You may need to involve lawyers if they have broken a divorce or separation agreement.
If you are on speaking terms with your ex, encourage them to seek credit counselling from a reputable, non-profit credit counselling organization in their area. The credit counsellor will help them with their budget and provide free guidance about getting their finances back on track. If they have other debts that have caused the joint one to fall behind, the credit counsellor can suggest options for dealing with all of their debts effectively.
What Happens If You Stop Paying Your Credit Card?
The bottom line on divorce and joint or cosigned debt
There’s no one-size-fits-all solution when dealing with joint and cosigned debt in a divorce and it can be hard to watch a family member, partner, or close friend struggle financially. If you want to help, consider offering non-financial assistance as they look for ways to get back on track. Offer to attend banking or credit counselling appointments with them for moral support, provide childcare assistance, invite them over for dinner, or share fresh fruit or vegetables from your garden with them. By focusing on solutions, and showing continued support, you’ll be sure to not only demonstrate your commitment to them, but you will also help them navigate these challenging times.
Steps to Take to Make Joint Debts Work
5 Financial Red Flags In a Relationship
3 Ways People Get Caught by Joint Debt
Peta Wales is President and CEO of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Peta by email, check nomoredebts.org or call 1-888-527-8999.