Property Settlement Agreements (herein after “PSAs”) are generally the mechanism utilized to set forth the terms of parties’ agreements and regulate post-judgement (post-divorce) issues. However, PSAs are not entirely enforceable in the context of bankruptcy. One example is in the context of joint debts or loans where one party assumes liability pursuant to the PSA and agrees to indemnify and hold the other harmless, but the other party’s name is not removed from the loan or debt. While such an agreement is enforceable by the Superior Court and generally properly brought before the family law division, this is not the case in the context where one party subsequently files for bankruptcy. If the party, who is not responsible for the debt or loan pursuant to the PSA, does not have his or her name removed from such debt or loan, once the responsible party is relieved of such debt or loan, the creditor can pursue payment from the other.
For example: Wife has a daughter from a prior relationship. Wife obtains a loan to pay for her daughter’s college education. Her husband, who is not the daughter’s father and thus has no legal responsibility to provide for her education, co-signs the loan. Husband and Wife are divorced three years later. In the Property Settlement Agreement, Wife agrees to be solely responsible for the loan and to indemnify and hold Husband harmless for same. Five years after entry of the Final Judgement of Divorce, Wife files for bankruptcy. The bankruptcy court discharges her from liability for the loan. The creditor subsequently pursues Husband, who has now not had any contact with Wife in several years, yet whose name remains on the loan as co-signor. When Husband does not make payment, believing that he is not liable for the loan pursuant to the parties’ PSA, and Wife’s agreement to indemnify and hold him harmless for same, the creditor begins to garnish his wages. (Alternatively they may have obtained a judgment against his home or other property.)
How to Protect Yourself:
1. Close all joint credit cards and/or accounts as soon as possible following entry of the PSA and/or Final Judgement of the Divorce, subject to the terms thereof.
Open new accounts and/or credit cards.
2. If possible, utilize joint funds prior to the division of same, to pay off or pay down joint debt. Upon division of same, pay off the debt utilizing a mechanism that will ensure that you both have a separate obligation under separate accounts. (i.e. there is $8,000 of marital credit card debt on a single charge card and each party agrees to be responsible for $4,000 of same. Each party should open a new card and transfer his or her share of the debt to that new account satisfying his or her obligation and ensuring that the marital debt is paid in full and the account is closed). Request that language placing such an obligation on both parties be included in the PSA if it is not already.
3. Have all joint loans refinanced, such that the non-liable party’s name is removed. Alternatively, consolidation may be a solution.
4. Check your credit score regularly. You are entitled to a free credit score report through the three main credit reporting agencies. However, when doing so via internet, beware of websites such as freecreditreport.com, where in order to access your credit report and score, you are automatically signed up for a 30 day trial, after which a monthly fee will be charged to your credit card. Read all small print thoroughly to avoid giving permission allowing the credit reporting agency from charging your credit card.