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My borrower got divorced – now what?

My borrower got divorced – now what?

It is not uncommon for a recently divorced borrower to tell their lender, “Hey, I want to get my ex-wife or ex-husband off the loan I have with you.” The typical reason for the borrower’s demand is an agreement the borrower made with his or her former spouse in the divorce action.

In a divorce, one party usually accepts responsibility for a debt. That party then, customarily, agrees to a “hold harmless” clause within the divorce agreement.

The hold harmless clause essentially says that, if the responsible party defaults on the assigned debt and the lender comes to the non-responsible party for payment, the responsible party will “hold the non-responsible party harmless” from any damages (meaning money) paid.

Additionally, after a divorce, if the non-responsible party remains responsible on the loans—at least on paper—and those loans or obligations continue to show on his or her credit report, which can make obtaining future credit difficult.

So, when the borrower comes to you and asks that you take the ex-husband or wife off the loan, what do you do? The lender is under no responsibility to remove the ex-spouse.

While the spouses may have agreed between each other who would be responsible for the debt, the lender’s rights to collect from either spouse are unaffected. In short, the divorce agreement does not bind the lender.