Explanation of secured debt
Secured liabilities have an interest in real property or other assets that can be used to satisfy a debt if payments are not made. Therefore, secured liabilities have inherent properties that must be addressed in the divorce process.
Secured debt is concerned with a specific asset
Secured debt is normally tied to a specific asset. For example, the house mortgage is secured by the house and the property it sits upon.
In the summary of the marital estate and its ultimate division, the assets and their associated debt should be kept together. It is simply not appropriate for one individual to take possession of a car, and have the other spouse assume the debt on the vehicle. The reason for this is control. Divorce, to the fullest extent possible, should remove the control that the parties have over each other. Separating assets from their associated debt allows the person with the debt to control the party with the asset.
For example, assume that an ex-husband is responsible for paying the debt on an ex-wife’s car as part of the divorce settlement. Assume also that the ex-wife has moved on and has a boyfriend. The ex-husband sees the boyfriend driving the ex-wife’s car and tells the ex-wife that he will stop making payments on the car if he ever sees the boyfriend driving the car again. The ex-husband has been granted inappropriate control over the ex-wife by the terms of the marital estate division.
Secured debt is usually joint debt
Parties frequently incur debt jointly to purchase assets. This creates a problem when one of the parties assumes responsibility for an asset and the associated debt as part of the divorce. It may not be possible to remove the spouse who is surrendering the asset from the joint liability. This is because while the courts and divorce managers may be able to divide assets and liabilities, they generally have no jurisdiction over lenders. They simply have no authority to mandate that a lender remove a person from an obligation. In addition, lenders are reluctant to remove anyone from responsibility for debt payment.
In some cases it may be possible for one of the parties to refinance the debt on an asset based on his or her own financial strength. However, divorce is notoriously hard on individual finances, and the opportunity to refinance may not exist. This creates a contingent liability on the part of the person who is not receiving the asset. That is, they can still be held liable for the debt if the other party does not pay.
Sometimes the only solution for this situation is for the parties to simply recognize the existence of the contingent liability, or make provisions for it in the case of default, or provide the spouse with the contingent liability additional assets to compensate him or her for the risk associated with the contingency.