A recently decided case in Indiana addressed an issue often not considered in divorce proceedings, namely, if one or both of the parties (Husband and/or Wife) have co-signed on a loan, is that a debt of the marriage?
First, a co-signer is generally not liable until the borrower actually defaults on the loan. This is done as a guarantee to the lending institution if the borrower does not have a solid credit history (either because of debts defaulted on or the borrower is young and does not have established credit yet). The most common occurrences are co-signing on a car, apartment, or student loans.
Clearly parents want to help their children be able to go to college, in most cases, and will often co-sign on a student loan. The student, or child, will generally not start paying on the loan for several years, as most do not require a payment while enrolled in school, and then payments can stretch from 10 to 25 years in some cases. Thus, if a parent co-signs, his or her potential liability on that debt lasts for a number of years.
As has been discussed in prior blogs, all debts and assets of a marriage must be divided by the trial court during a divorce proceeding1.
In Lutrell v. Lutrell, the Court of Appeals addressed the question of if the parents do not have a present duty to make payments on student loans they have co-signed on, is this a debt of the marriage subject to division2? The Court of Appeals answered, yes.
The Court of Appeals recognized that the children had not yet defaulted on their student loans, nor were the student loans even in re-payment. However, the fact that the parent or parent had co-signed meant that if at some point in the future the child did default on the loan, the parent or parents would be liable for the debt. Thus, the Court of Appeals held that the trial court must determine, if the co-signers are ever called on to satisfy the debt, which party is responsible, either Husband or Wife (or both and what % each is liable for). The Court of Appeals reasoned that this was the trial court’s duty to determine because “[w]hile it is possible that neither [Husband] or [Wife] will be called upon to make good on their promise to repay the loans, at the same time, their names cannot be removed from the loans.”
We hope that this blog post has been helpful in understanding how being a co-signer on a loan is an issue that should be addressed in a divorce action. Every case is different, and it is recommended that you consult an attorney to determine the best course of action to achieve your goals in your specific case. Ciyou & Dixon, P.C. practices throughout the state of Indiana. This blog post was written by attorney, Lori Schmeltzer.