Divorce, car loans and a deficiency balance

Divorce, car loans and a deficiency balance

A common theme that comes from our Detroit clients is how emotionally upsetting a divorce can be. Of course, it is not just the divorce. By the time individuals are ready to speak to a divorce attorney, they have likely been dealing with months or years of emotional discomfort. Divorce does not cause people to end their marriages but is simply the legal mechanism that creates the formal recognition that a marriage is over.

In that process, an important element is the financial separation of the marital property. It is very important that you understand that when you divide your assets and debts, your agreement with your spouse may not be binding on the companies with which you have financial relationships.

This is why you need to cancel any joint credit cards and refinance items like car loans before your divorce is final. While your property division in Michigan may indicate your wife or husband is to be responsible for 2012 Explorer or 2015 Caravan, if you are on the loan as a co-obligor, the lender can look to you for repayment if your former spouse stops paying.

Consider this common scenario. After a divorce, one of the parties finances become so overwhelmed that they file bankruptcy. They surrender their vehicle with high payments and find something cheaper. The lender takes the car back and sells it at auction. Because vehicles at an auction almost never sell for anywhere near their loan value, there is likely to be a “deficiency balance” for the difference.

Because your spouse discharged their portion of that debt, the lender cannot collect from them. But, if you were still on the loan, the lender could begin collection efforts against you, which would damage your credit rating and you would be legally obligated to pay that debt.

Your remedy would be to sue your former spouse for the deficiency balance, but that could cost almost as much as your potential recovery and if his or her finances are still precarious, there may not be any money to recover.

The bottom line is you want to be certain your divorce agreement separates all of your finances, especially any loans, credit cards or other financial obligations.


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