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The Divorce Encyclopedia
Creditor’s Rights

Term Definition Creditor’s Rights - the piper who must be paid.

Application in Divorce In a marital breakdown, dividing the debt is a preliminary to paying it, and creditors take no holiday when a marriage crashes on the rocks of divorce. When the ship breaks up and spouses barely keep their heads above water, creditors hover like sharks, unseen but there, and the assertion of their rights happens like a shark’s bite.

Put simply, in a community property state, a spouse is responsible for debts incurred in the marriage regardless of which spouse’s name is on them. In an equitable distribution state, debts in one spouse’s name are his or hers alone. However, even in these jurisdictions, a spouse is responsible for debts taken in his or her name without consent. In all jurisdictions, joint credit card debt is jointly owned.

In fashioning a settlement agreement, a divorcing couple must carefully evaluate the effect of creditor’s liens on the property rights.

A few general principles apply when divorce actions involve creditors’ rights.

In a divorce trial, a court fixes the responsibility for debts between the parties, yet it cannot limit or impair a couple’s indebtedness to a third party unless the creditor is joined in the action.

When property is awarded to one spouse, the debt incurred to purchase it remains the responsibility of the spouse who made it.

When both parties signed a note, the creditor may collect from either or both, regardless of who receives it in the property distribution. This is an application of joint and several liability.

A divorce court cannot enter a judgment against one of the spouses in favor of creditor in an attempt to make that spouse pay.

In some jurisdictions, courts have judicial discretion to block the attempts of a secured creditor to execute on marital property during equitable distribution proceedings. This means, however, that a lender may be able to foreclose on a house during a divorce. (This is another good reason why it is imperative that a mortgage be keep current during a separation.)

When an unsecured creditor obtains a lien against one spouse during equitable distribution proceedings, courts generally protect the nondebtor spouse’s interest in the property.

In general, a spouse who is awarded marital property takes the asset with any pending liens and judgment. This means a creditor may execute after distribution. This could well be a consideration when a couple decide who gets which automobile.

Property held by married couples as tenants by the entirety usually reverts to tenancy in common after a divorce. A creditor’s lien on a tenancy by the entirety remains when that interest is transferred to the other spouse by equitable distribution. This means that the lien attaches to an undivided one-half interest in the property, and it must be considered in future transfers of the property.

See also Dividing Debt; Children and Equitable Distribution; Creditors’ Rights; "During the Marriage"; Joint and Several Liability; Bankruptcy.

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