If the court awards you the family car in the divorce settlement, it may give you the car loan, too. If you and your spouse are both on the loan, the court may require you to remove your spouse's liability for repayment of the loan. This usually involves working with your bank to refinance the loan or pay it off.
Paying Off the Loan
Most state courts distribute assets and liabilities equitably between spouses, which means the court splits your assets in a fair manner, though not necessarily equally. Courts may consider the amount of money owed on a loan when dividing the property attached to it and balance the value of any remaining assets you receive with the total debt the court assigns to you. Thus, you may receive enough additional assets in your divorce to pay off the remainder of your vehicle’s loan. Paying off the loan releases both you and your spouse from liability on the vehicle loan and once the loan is paid off, it is usually a simple matter of visiting your state’s motor vehicle department to have the title changed to remove your ex-spouse’s name.
If you are unable to pay off your loan or don’t receive enough value in other property to pay it off, you may have the option of refinancing the original vehicle loan. With a refinance, your bank actually pays off the old loan by issuing you a new loan; thereby, eliminating your ex-spouse’s liability on the original loan and replacing it with a loan in your name only. Similarly, you may obtain another loan using other collateral and use the money from that loan to pay off the vehicle loan. You and your ex-spouse may wish to formalize the necessary title changes at the same time as the loan change. This way, your ex-spouse’s name is removed from the vehicle title at the same time he is removed from the loan.
Hold Harmless Clauses
Your divorce decree or marital settlement agreement may contain a provision requiring you to hold your ex-spouse harmless on your joint vehicle debt. Such a “hold harmless” agreement means you are obligated to pay all joint debts assigned to you in the divorce and your ex-spouse can sue you if he is injured by your failure to pay those debts as ordered. For example, if you don't remove your ex-spouse from the loan and he has to make a payment on the loan because you failed to do so, you may have to reimburse him for the payment he made.
Your creditors are not bound by the terms of a hold harmless clause, marital settlement agreement or divorce decree. Instead, your relationship with your creditors is governed by your loan documents. Thus, if you do not refinance or pay off your loan, your ex-spouse may remain legally liable to pay the vehicle’s loan no matter what your divorce documents say. Your failure to make payments on time can even be reported on your ex-spouse’s credit report since his name is still on the loan.