Debt During Divorce in Pennsylvania
It is a rare person who owes no one money. Comedians have said that it is un-American not to be in debt. While that is really not accurate, it is an understandable joke. Married couples typically have debts. Those well off enough to buy a home most likely have a mortgage to pay every month. Even more couples have credit card debt and most of them pay what they can every month, but relatively few are able to pay off their credit card debt every month and thereby not be charged the very high credit card rate of interest. Those barely scraping by may just make the dreaded minimum payment which can result in the balance either continually increasing or going down very, very slowly.
When divorcing, the couple is free to decide, under Pennsylvania law, who will be responsible for which debts. A professionally drafted settlement agreement would specify the division of debts and add that each party must pay the agreed debts on time AND hold the other party harmless from the payment of that debt, that is, protect the other party from having to pay that debt. Now, that is nice, as far as it goes, but as a marital debt, both parties owe the money during the marriage and after the divorce and if the party who agreed to pay a particular debt fails to pay it for any reason (like simply refusing to pay, losing a job, dying etc.), the other party remains responsible even though you have that written agreement. That agreement is just between the ex-spouses and does not change the right of the party to whom the debt is owed to collect it from either of both of you. So, if A and B have an agreement as part of their divorce whereby B agrees to pay the debt to XYZ Company from whom A and B purchased something for the marriage and B fails to pay, XYZ can demand that A pay the debt and can sue A, B or, most likely, A and B, to enforce payment of the debt. No doubt A will complain because B agreed, in a binding legal agreement, to pay that debt and failed to do so. The agreement is real and it is legal and binding upon B to pay, so what is A’s remedy under the agreement? A gets to sue B in Court to collect the amount A had to pay XYZ. Not only will that take time and cost A legal fees, but if B has no money (or assets that are worth money), A would have no way of forcing B to reimburse A for the money A was forced to pay on behalf of B. Personally, as a lawyer who routinely prepares marital settlement agreements for divorcing clients, I always put a condition in such agreements that if a party breaks the agreement in any regard and the other party has to hire a lawyer to attempt to enforce the agreement, the party who broke the agreement would have to pay the other party’s legal fees. If a party knows that breaking the agreement means paying the legal fees for both parties, it is a good bet that the parties will do their absolute best to do what the agreement requires them to do. After all, paying a lawyer when someone sues you is bad enough without having to pay the other side’s lawyer too!
Assuming the divorcing couple can agree who will pay what debt, we still have to discuss certain aspects of what is usually the largest debt, the mortgage on the realty, but before I delve into that, I first want to discuss the common topic of when only one spouse’s name is on a debt or account, including a mortgage. Let’s go back to A and B and A has a credit card in A’s name only with a, say, $5000.00 balance. B may well consider that A’s debt and A should be solely responsible. Not so fast, B… If that $5000.00 balance was for wall-to-wall carpets for your marital residence’s first floor, then that $5000.00 is a joint marital debt and NOT just A’s even though only A’s name is on that credit card. I trust that does make sense and is perfectly fair. Now if B has a debt that is only in B’s name and B ran it up at the local casino without A’s knowledge or approval, then that is hardly a joint marital debt and B alone should be responsible for paying it.
The above theory also applies to a mortgage that, for one reason or another, might be just in the name of one spouse. In other words, if the mortgage in a divorce is a loan on the marital residence where both spouses reside, then the mortgage is a joint marital debt for which both spouses are responsible even though it may have only one spouse’s name on the loan document.
When A and B are finally divorced and all property and responsibilities are divided between them, let us consider a situation where A still has that $5000.00 credit card balance in just A’s name, but we know it is really a joint marital debt and the payments on it stop being made. The company due the $5000.00, seeing only A’s name on the account, will likely just try to collect from A even though B owes it too. Why would the company just go after A? Frankly, out of a lack of knowledge, even stupidity. A sharp company, collector or lawyer, with some effort, could determine that the $5000.00 was a marital debt and legally pursue A and B. Sad to say – or if you are B, not sad – people in those positions are frequently not as sharp as they need to be. This really is not a divorce issue, but I thought you might find it interesting nonetheless.
So, recapping, if you are getting divorced, the debts the two of you ran up as a married couple will remain due. The two of you can decide, formally in writing or just on a “handshake”, who will pay what knowing that even after the divorce, if a joint marital debt does not get paid, you would both remain responsible. And, if you have a properly drafted settlement agreement and the party who agrees to pay a particular debt fails to do so and the other party ends up having to pay, the agreement will give that paying party legal recourse against the party who had agreed to pay, but failed to do so.
Before I wrap this up, I want to discuss an issue that can give pause to a person getting divorced who, in order to get divorced, agreed to give the other party the marital residence but had to agree also, because the party keeping the home could not re-finance the realty into that party’s sole name, left both names on the mortgage, trusting that the mortgage will be paid. Let’s face it. If one decides one must be divorced, how much sense does it make to decide to stay married because the other party, the one staying in the marital residence, may not make the mortgage payment? Sure, it is a risk, and if you must remove you name from the deed to get the divorce and the mortgage does not get paid, you could end up being required to make the mortgage payment on a property in which you no longer have an ownership interest. But, the other side of that coin is that the ex-spouse who stayed in the realty and agreed to pay the mortgage knows that if the mortgage does not get paid, that ex will soon have to leave the property when foreclosure happens. Chances are, paying the mortgage – and not having to move – is a far cheaper alternative than finding a new place to live, especially when a future landlord knows why you had to move out. Those divorce settlement agreements are typically part of the final divorce decree and are, therefore, a public record. Accordingly, there is quite a bit of pressure to make the mortgage payments in accordance with the agreement and, when one sees the time coming that making the mortgage payment may not be possible, the best solution would be simply to sell the home.