What happens if your spouse is ordered to pay a debt in your divorce decree, doesn’t, and you both get sued?

When you are married, you and your spouse accumulate debts together.  Most likely, those debts are either in one or both of your names.  From a divorce attorney’s perspective, it is always best if the debt is in your name or your spouse’s name and it is associated with an asset that you are receiving.  For instance, if you are awarded the car but there is still a note on the car—as long as the note is in your name alone, awarding you the car and the debt associated with it does not create an issue for your spouse.  But, if the debt is in both of your names then the other spouse either wants you to refinance OR sell the asset.  Reason being, if your spouse is ordered to pay a debt that is in both of your names but fails to do so then it affects your credit and the creditor can still come after you for repayment of that debt.

In some instances, people rely upon indemnification provisions within divorce decrees in order to protect them when a debt is in both parties’ names but only one spouse is ordered to pay the debt.  An indemnification provision looks like this:

“Each party represents and warrants that he or she has not incurred any outstanding debt, obligation, or other liability on which the other party is or may be liable, other than those described in this decree.  Each party agrees and IT IS ORDERED that if any claim, action, or proceeding is hereafter initiated seeking to hold the party not assuming a debt, an obligation, a liability, an act, or an omission of the other party liable for such debt, obligation, liability, act or omission of the other party, that other party will, at his or her sole expense, defend the party not assuming the debt, obligation, liability, act, or omission of the other party against any such claim or demand, whether or not well founded, and will indemnify the party not assuming the debt, obligation, liability, act, or omission of the other party and hold him or her harmless from all damages resulting from the claim or demand.

Damages, as used in this provision, includes any reasonable loss, cost, expense, penalty, and other damage, including without limitation attorney’s fees and other costs and expenses reasonably and necessarily incurred in enforcing this indemnity.

IT IS ORDERED that the indemnifying party will reimburse the indemnified party, on demand, for any payment made by the indemnified party at any time after the entry of the divorce decree to satisfy any judgment of any court of competent jurisdiction or in accordance with a bona fide compromise or settlement of claims, demands, or actions for any damages to which this indemnity relates.

The parties agree and IT IS ORDERED that each party will give the other party prompt written notice of any litigation threatened or instituted against either party that might constitute the basis of a claim for indemnity under this decree.”

When reading a provision like this, it does seem pretty solid.  The key thing to keep in mind is that it is an indemnification from liability, not damages.  The Tenth Court of Appeals addresses this issue in Jason Stubbs v. Julianne Stubbs.  In that case, the husband was awarded business entities and the liability associated with those entities in the divorce.  Shortly after the divorce, the wife was sued by a credit card company for credit given to one of the business entities.  The wife had to hire a debt defense attorney and incurred attorney’s fees as a result.  The wife then sued the husband to enforce the indemnification provision in their divorce decree (identical to the one above). The trial court granted the wife her attorney’s fees that she incurred in the debt defense suit and for the installment payments that the husband failed to pay for the credit card.  The husband appealed.

The Court of Appeals noted that a claim under an indemnification provision is associated with the liability and the liability for the party seeking damages has to be “fixed and certain” before the indemnification provision arises.  Therefore, the Court of Appeals upheld the trial court’s decision because they stated that the language within the decree stated that the husband would hold the wife harmless for any claim that arose and would indemnify her from all damages that arose from said claim.  In this instance, the wife’s damages were fixed because of the attorney’s fees she had to pay in defending against the debt collection suit.

This gives hope to many people who have been affected by their spouses failing to pay a debt.  There are two obstacles though—the key seems to be that you do have to defend yourself in a debt suit and accrue “fixed damages” before you can sue your spouse under the indemnification provision; the second key is that what you will get from the suit is a judgment.  You have a right to enforce that judgment, but you incur more attorneys’ fees to do so and you incur more attorneys’ fees to sue them.  So, if you know that your spouse has the money to cover all of those damages then you should sue them. If anything, you have a judgment to hang over their head and for a significant amount of money it is worth it.  These are the types of cases that you have to weigh your pros and cons.  If you would like to discuss this further, call today to schedule a consultation.