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DIVORCE AND BANKRUPTCY: THE HOLD HARMLESS AGREEMENT

YOUR DIVORCE DECREE MAY NOT PROTECT
YOU FROM YOUR SPOUSE’S CREDITORS

In most divorce cases, both parties have a substantial amount of debt. In fact, it is frequently debt that is one of the major causes of the divorce. Therefore, one of the issues that often arises in divorce cases is how that debt is going to be divided between the parties. While dividing up assets is fairly straight forward, dividing up debt can be much more complicated.

Divorcing couples typically enter into what is called a “hold harmless agreement” regarding their creditors. This is simply an agreement between the parties as to who will pay which creditors. If the creditors that each party has agreed to pay are his or her own individual creditors then there is no problem. The parties simply have agreed to pay their own debts.

But what if the creditors being divided up are actually “joint” creditors, that is each party is responsible for the debt? If the party taking responsibility for the debts pays as agreed then everything is fine. But what if that party fails to pay the debts assigned to him or her or files bankruptcy? Is the other spouse legally responsible to the creditor or will the hold harmless agreement protect her? The answer is that the hold harmless agreement will not in fact protect her. That document is simply a contract between the former spouses. It has no legally binding effect on the creditor. So if the party who assumed the debts defaults, that creditor can take action to collect the entire debt from the other party.

In addition, if the spouse who assumed the debts pays late, this will negatively effect the other party’s credit standing.

In this scenario, the victim of such an event is not completely without recourse. For she can seek to hold her ex-spouse in contempt for violating the terms of the divorce decree. But in the meantime, it will not stop the creditor from suing her and perhaps garnishing her paycheck.

So before you start celebrating the fact that you are walking out of your divorce debt free because all the debts were assigned to your ex-spouse, consider that what you have may not be worth the paper it was written on if your ex-spouse cannot or will not comply.

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