Dear Rick:
I have a problem I hope you can help me with. A few years ago I got divorced. The main reason for the divorce was the fact that my husband virtually lost all our money. He invested in a variety of oil wells and they all went belly up. At the time of our divorce we virtually had no money and as a result, I got nothing from our divorce. At the time of our divorce my husband was on the hook for various loans. Fortunately, my name was not on those loans. My problem is that I was on one of the loans at the time of the divorce. In our divorce settlement it clearly states that my ex is responsible for that loan. Last year I got notice that my ex had defaulted on the loan and that they had brought a lawsuit against my ex and me. A very good friend of mine told me that I had nothing to worry about since my ex was responsible for the loan and that I had no money. That turned out to be a mistake. The company went to court and got a judgement against me and my ex-husband. My ex-husband is nowhere to be found and the company just started to garnish my wages. My employer told me they have no choice in the matter. I don’t have money to hire an attorney so hopefully you can give me some advice. First, do you think I have any obligation on the loan because my ex-husband in our divorce settlement is responsible for it? Second, if I am responsible, do you have any suggestions? With interest the amount of the debt is a little over $100,000. I don’t have that money and it will probably take me 20 years if they keep garnishing my wages.

Thank you.
Paula

Dear Paula:
Unfortunately, I do believe that you have responsibility to that outstanding loan. The fact that your divorce settlement provides that your ex-husband is responsible for that loan does not impact the lender who is not a party to your divorce. Therefore, since you were a party to the original loan you are still liable to the lender. Of course, you have a cause of action against your ex-husband for any monies that are garnished from you but unfortunately, that is the only recourse you have.

It is important to remember when you enter a divorce agreement, the agreement is between the two parties; it doesn’t affect outsiders. That is why if there are outstanding loans with both parties responsible for it, you need to deal with those debts cautiously. This same situation happens frequently in bankruptcy where two parties are a signatory to the loan; one party declares bankruptcy and is relieved of their obligation but that does not impact the other party who could be forced to pay off the entire loan.

With regard to your options, you do not have many. I think it would be a costly mistake to try to overturn the judgment against you. It seems to me from the facts that you laid out, more likely than not, you would lose and all it would do is cost you a fair sum of money. However, there is an alternative that you may wish to consider and that is bankruptcy.

As you described in the letter, your divorce left you broke and at this point in time you have very little assets. Therefore, a bankruptcy may allow you to discharge your obligation under the debt at virtually no cost to you. My reasoning for considering bankruptcy is the fact that you do not have assets to pay off the loan and as you say it’s going to take you 20 years to repay it. I would think a better course of action is to go through bankruptcy so that you can get a fresh start and start rebuilding your finances.

I know many people would say that you should never consider bankruptcy; I am not one of those. I believe bankruptcy is in the law and those in need ought to take advantage of it. After all, we have seen corporate America take advantage of bankruptcy laws and I see no reason why individuals should not use it to their benefit as well. I don’t always believe bankruptcy is the first choice to consider; however, for those people in difficult financial situations it is something they should consider.

Bankruptcy is not for everyone and in many situations it causes more problems than it resolves. However, in the situation at hand, I believe bankruptcy would be a viable option and one that you should pursue.

Good luck!

Rick is a fee-only financial advisor.  If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.
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