Contingency Liability in a Divorce

by Rob Jennings

Contingent liabilities are potential debts where a party's responsibility has yet to be determined. At the time you and your spouse separate pursuant to a divorce, you may have pending situations where the outcome will depend upon future events, leaving you unable to determine for sure the amount you will owe or even whether you will owe anything at all.

Tax Deficiencies

Money owed to state, federal or local governments based upon a couple's previous years' tax returns are a common form of contingent liability that arises during a divorce. Although state laws on debt division in divorce vary, debts incurred during marriage are generally considered to be "marital debts," which a family court judge has the power to assign as part of the divorce proceeding. Even if only one spouse was employed, a tax liability will commonly be considered a marital debt if the income that produced it was earned during the marriage. If the amount of the liability remains undetermined at the time the divorce is settled, the judge can assign responsibility to one party solely, or to both parties in equal or unequal shares.

Repossesion of Marital Property

Financial pressures inherent in the divorce process can sometimes lead to foreclosures of real property and repossession of personal property such as vehicles or boats. When a creditor repossesses property, it will generally sell it at an auction to offset the debt. Sometimes this results in a deficiency between the sale price of the asset and the outstanding debt balance. Although the property sale may not occur before you're ready to divide your marital debts, the possibility exists that you and your former spouse may face a deficiency judgment on a joint mortgage or personal property loan. A divorce court order that gives one party the sole responsibility for a joint debt won't necessarily prevent the cosigner from being sued or having his or her property seized by the creditor if the debt is not paid.

Medical Bills

Contingent liabilities can arise from medical treatment rendered to a spouse prior to divorce. For example, under North Carolina's common law "doctrine of necessaries," you could find yourself being sued by doctors and hospitals who rendered necessary medical treatment to your spouse before the entry of a divorce judgment, even though you were separated at the time the treatment was provided. Due to pending insurance claims and unsettled disputes with providers, the precise amount of medical treatment liability, if any, may not be certain at the time marital property and debts are divided.

Civil Suits

Your responsibility for your ex's future legal judgments stemming from ongoing or potential civil suits for personal injuries, property damage, unpaid debts and breach of contract claims -- to name a few -- depends on the laws of your state. Even if the accident or event giving rise to the potential liability occurred during the marriage and appears to qualify as a marital debt under your state's laws, you may be able to exclude the contingent liability from being treated as marital debt if the act that gave rise to the liability could be classified as misconduct such as fraud, drunk driving or reckless spending.

Considerations

Contingent liabilities create problems when deciding how to divide marital property and debts because they can alter a party's financial position months or years after the divorce case is closed. In some states, even a separate debt -- one incurred before marriage begins or after it ends -- can affect how a court divides marital property and debts. The amount of contingent liability for debts also influences a party's ability to pay, or the need to receive, spousal or child support, so it is important to resolve as many contingent liabilities as possible before finalizing your divorce.