What Does It Mean When Your Name is on a Piece of Property or on a Debt?
People have many misconceptions about property ownership and debt. If your name is on a piece of property or a debt, the legal result is very different in Divorce Court vs. Civil Court or Bankruptcy Court.
In a marriage/divorce situation in New Jersey, property acquired during the period of “coverture” - from date of marriage to date of complaint for divorce- is subject to equitable distribution (division typically to both parties). It does not matter whose name is on the property - whether it is held jointly or separately in individual names. The only property that would be exempt from equitable distribution is premarital property or property inherited and kept in the recipient’s individual name.
Also if debt is acquired during the course of the marriage for “living expenses” (and this is a broad category), no matter whose name is on it, it would be subject to equitable distribution. Both parties would be responsible for the debt. For example, if you both had credit cards and used it for living expenses, the debt would be shared. The Family Court is a “court of equity”. Therefore, the unique facts of the case play a part in equitable distribution. The judge has broad discretion to determine what is fair based on the totality of circumstances. However, one should be keenly aware in a divorce that the name alone on the property or debt acquired during the marriage is not relevant to who receives or is responsible for same.
How about outside the Divorce Court? Debt owed to a creditor and property ownership in the world outside Divorce Court is completely different. If your name is on a debt and your spouse’s name is not, the creditor has no right to go after your spouse for non-payment. If a piece of property has always been in your name, whether before or during the marriage, and never in your spouse’s name and your spouse is in debt or files for bankruptcy; the bankruptcy court and/or creditors of your spouse cannot go after your piece of property.
Obviously, jointly held property clearly involves both parties whether in or outside Divorce Court, in or outside of Civil or Bankruptcy Court.
A very typical problem I see in divorce occurs when one spouse in a divorce takes title to a house in the Agreement, but does not refinance the Mortgage and Note, which is in joint names.
The Property Settlement Agreement in the divorce, which is an Order, often says that the party now residing in the home (we will call her “Roxanne”, resident) shall be solely responsible for the Mortgage, which was originally taken in both names, and shall indemnify and hold the other party (we will call him “Marvin”, moved out) harmless.
Again, this is a Court Order. One would think that Marvin is no longer responsible for the Mortgage payments and is secure. This is simply not true. Marvin’s contract is first to the bank on the Mortgage and Note. Roxanne’s promise does not remove Marvin’s obligation to the bank. It’s like being a co-signor on a loan. You are liable if the signor does not pay. If Roxanne does not pay the Mortgage, Marvin’s credit will be harmed – it will show non-payment on his credit report. If Roxanne allows the Mortgage and home to go into foreclosure, Marvin’s credit will show a foreclosure and he will have to deal with the debt. Marvin can take Roxanne back to Divorce Court to enforce the agreement and/or to force the sale of the property to stop the damage, but it is a very bad situation and Marvin has to pay a lawyer to go back to court, probably not what he bargained for. Typically, Marvin won’t get all of his counsel fees back for the enforcement. While the house is on the market every payment not made will affect Marvin’s credit. If the house is taken or a short sale done, depending on when Marvin last lived in the home, there might be tax ramifications as well. Unfortunately, Marvin sometimes even has to file for bankruptcy because of the debt with this house, even though Roxanne was “responsible” in the divorce.
The moral of the story is: if it is possible, do not remain on a debt jointly with an ex-spouse in an Agreement.
Agreement: If there is a debt in your name and you are counting on your ex-spouse to pay it, this is a precarious position to be in. Better to remove your name, if possible, from any debt your ex-spouse will pay. If he/she does not pay it, you will be in trouble even if the divorce agreement says otherwise.
Before you make any decisions about property or debt transfers or responsibility always consult competent counsel.
Tanya Helfand, Esq., handles both divorce and bankruptcy matters.