The information you entered when you cosigned a car loan for a spouse with poor credit is part of the binding contract represented within the financing. Even if your divorce decree indicates that shared debt be absorbed by your spouse alone, you are still responsible for the loan you cosigned. The loan application and financing agreement are binding contracts not affected by new outside agreements like a divorce decree.
Your former spouse has to continue making timely payments toward the high-risk car loan you cosigned, or your credit will be negatively affected. Credit reporting agencies, just like the lender, will not care whether or not your divorce decree absolves you of shared debt. Once you are included in that car loan, your credit is just as vulnerable your spouse’s credit. However, if the payments are made responsibly, your credit score could be improved along with your spouse’s on the loan.
The worst case scenario when you experience a breakup after cosigning a high-risk car loan for a spouse is that the car is repossessed, and the loan defaults into collection. Not only will this poorly affect your credit score, you could also end up paying out of your pocket for the fees and remaining loan balance. It is up to the lender whether they pursue the primary party or the cosigner.
In order to ensure that a loan you cosigned for does not negatively affect your financial standing after a breakup, you need to get yourself off of the loan. There are two ways to get out of a loan you have cosigned.
The first is to close the account by paying off the loan. This can be worked into a divorce settlement before the breakup is final. The proceeds from liquidated joint assets can be used to repay shared debt, like a car loan, before any settlement changes hands.
The second option is to have the loan refinanced without your name included as a cosigner. This is not considered a new outside agreement like the divorce decree, as the updated loan completely replaces the preexisting contract.
In the unfortunate event you are going through a breakup, be sure to take a realistic look at the shared debt you are responsible for even after a divorce is finalized.
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