Divorcing couples have plenty of important issues to resolve, including child support, custody issues, and division of property (perhaps including a jointly owned home). Settling who owes what on a car loan -- and what to do with the car -- might not seem like a big deal, given the other items on the list, but it can have enduring consequences. This article answers some frequently asked questions about handling a car loan when you divorce in New Jersey.
What options do we have for handling our car loan?
When deciding how to deal with your car loan -- and all of your other debts and assets -- it's important to keep in mind that you'll have to live with the terms of the division long after your divorce is final. In my experience, the “real divorce” involves enforcing the terms of the judgment in years to come. Collecting child support and alimony can be a 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. Getting a former spouse to pay a credit card debt can be as elusive as peace in the Middle East.
Many divorcing couples can’t wait to be separated. They are thrilled with the prospect of not having to deal with their ex-spouse any more. Unfortunately, joint financial obligations often make this goal unreachable -- and car loans are no exception. Joint car loans can tie disgruntled spouses together for years, even after the divorce is final. To avoid problems, you should make sure that your property settlement agreement addresses what will happen to your car loan(s).
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 but haven't gone through with it yet, 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, especially if you have kids or either of you depends on the car to get to work. If a vehicle is sold, then how are the kids going to get to baseball practice, karate classes, or ballet classes? Will you be able to commute on public transit? Sometimes, going without a car is almost impossible, even for a short period of time.
The second best option is to have one spouse refinance the car in his or her own name. If one spouse will keep the car after the divorce, then you should insist that your soon-to-be-ex obtain new financing in his or her own name before the divorce. 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 require the financing spouse to go through the formal loan process to qualify. If he or she is not able to qualify for separate financing, maybe a relative can co-sign the loan.
Don't just take your name off the title, as this will remove only your ownership rights, not your responsibility for the loan. Put a time 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 both addresses. At the very least, inform them that you wish to be notified if any payments are missed. In this way, if your ex is late on payments, you will be notified and have 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 loan refinancing process requires that the parties cooperate. In many instances, it is impossible even to have the divorcing spouses in the same room together, let alone collaborating on complicated financial arrangements.
The most practical solution is often to use a setoff arrangement (against support or alimony) to insure that the car loan is paid off. This can also protect your credit rating. If a divorced husband has to pay alimony and child support, for example, he can try to work out an arrangement in which he pays the car loan directly, subtracting that amount from his support payments.
My spouse is responsible for the car loan, but I've been getting collection calls; should I pay what my spouse owes?
When two people apply for joint credit in purchasing a car, they sign a legal agreement with the auto finance company or the bank, agreeing 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 and the financial institution unless it is fraudulent or unlawful. A divorce will not invalidate or void an auto loan agreement.
Thus, a divorce judgment cannot relieve you from the financial obligations of a joint car loan, even if your agreement specifies that only one of you will be responsible for paying it. Your divorce agreement has no legal effect on the car contract. An amendment to the car loan contract requires the agreement of all of the parties, including the auto finance company. The auto finance company wasn't involved in your divorce and may not even know about it. Consequently, if your ex-spouse does not pay the auto loan that was assigned to him or her in the divorce judgment, you are responsible for it. If your ex stops making payments, the lender can sue you as well as your ex. And, if your ex stopped paying because of financial problems, you can bet that the lender will be very interested in coming after you.
Unfortunately, failure to keep up payments on car loans after divorce often leads to damaged credit reports for both spouses. This doesn’t have to happen, but it does take some effort and planning to avoid it.
Will my credit rating be affected if my ex doesn't make payments on the car loan?
If you have a joint car loan obligation with your ex, your credit will be affected if there are payment delinquencies. This is true even if your spouse was assigned sole responsibility for paying the loan in your divorce. Your legal obligation to pay back a loan you took out when married does not go away because a divorce judgment assigns responsibility for that debt to your ex. Along with your legal responsibility to pay comes the creditor's right to report the debt as delinquent on your credit report if it is not paid as agreed upon in the original contract. The creditor also has the right to sue both of you to collect on the loan.
An especially tragic situation occurs when an ex files for bankruptcy and includes the joint car loan debt in the case. Although the spouse who files for bankruptcy will likely receive a discharge of his or her obligation to repay the debt, the other spouse won't. This means that the spouse who did not file for bankruptcy is left holding the bag for the entire car loan. The “innocent” spouse might not even be 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 non-filing spouse responsible for the unpaid car loan, but that spouse’s credit is also ruined.
What can I do to protect myself if my spouse files for bankruptcy?
In many divorce cases, there are two or more car loans outstanding. The car loans are assigned to each spouse in the property settlement agreement. If one spouse later files for bankruptcy, that will likely wipe out his or her responsibility for the car debt. However, it won't wipe out the other spouse's obligation to pay back the loan, even if the divorce judgment did not assign this debt to him or her. To protect against this potential catastrophe, it's a good idea to add language to the property settlement agreement or divorce judgment that limits the impact of a bankruptcy. Clauses can be put into a property settlement agreement that will give a spouse the right to reopen a case if a spouse has filed for bankruptcy. Here are a couple of examples:
I'm being sued for a car loan debt after my ex-husband filed for bankruptcy; what can I do?
Under New Jersey law, courts have continuing jurisdiction to review awards of alimony and child support. A court may increase or decrease such an award if the spouses' circumstances have changed.
The post-divorce bankruptcy of a spouse is a change in circumstances that may warrant modification of an alimony award. More likely, it will be the non-debtor spouse who requests the modification, because the bankruptcy has diminished the amount paid to that spouse as part of the property distribution and because the discharge of the debtor spouse leaves more money available to distribute as alimony or child support.
In other words, you can file a motion with the family court, requesting that the alimony, child support, and other terms of the divorce settlement be reconsidered because of your ex's 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," and may increase the alimony or child support award to remedy this inequity.
Updated by: Lisa Guerin, J.D.