In today's times, joint debt, such as car and housing loans, and credit card dues is part of household finances. So, a divorce settlement
will not only be about dividing assets but also loans taken together.
You may have agreed on the ownership of the house, but who will service the loan taken to buy it? What happens to the car that has been taken on loan? Couples seeking divorce often contest each other's rights over assets and forget about the joint liabilities, which are more complex to handle. This is because a third party, the lender, is also involved. It is, therefore, important that you decide in advance on how to share these debts with least possible friction.
As a first step, you must inform the bank as loan agreements often require you to notify the lender about such changes in your lives. Unless there is any change in ownership of the property or a payment default, the bank will not interfere. So, if both decide to carry on sharing the loan burden even after parting ways, the lender won't have any problem.
The problem arises when one spouse does not want to remain a co-applicant if he/she is not getting ownership of the property. In such a case, the other spouse may agree to transfer the loan in his/her name. However, this may not be acceptable to the bank in certain cases.
This is because joint loans are usually taken to increase the loan amount. "If the co-applicants decide to part ways, the basic purpose of joint borrowing is hit. So, lenders are generally reluctant to convert joint loans into single-borrower loans," says Kamlesh Rao, executive vice president, Kotak Mahindra Bank.
If the bank had sanctioned the loan solely on the basis of the principal borrower's income, it would be easier for it to take a call and remove the other name from the agreement. But even in such cases, banks conduct due diligence by reassessing the creditworthiness of the person to whom the loan will be transferred.
If the spouse's income was considered while deciding the loan eligibility (you can get a joint loan without considering the co-applicant's income), the bank will be unwilling to execute the change unless you get a new co-borrower on board so that your loan eligibility remains the same.
"The bank will consider the new proposition for repayment and may agree only if all its settlement criteria are met," says Rao.
The criteria for removing your name as a guarantor from your spouse's loan
are the same; the bank won't clear your name unless it gets an alternative.
Simply notifying the lender about your divorce and sharing the details of the divorce decree will not get you off the hook. So, make sure that you get a written intimation from the lender on this. Otherwise, the loan agreement will supersede the court's direction even if the divorce decree lays down the loan-repayment terms. You will still be responsible for the repayment and any default will impact your credit score.
A better way to do this is to shift your loan to another bank. "Administratively, shifting your account to a new bank is more convenient. You can present it as a fresh case where the property belongs to a single owner and share your financial credentials. If there is nothing wrong with the case, the bank will be more than happy to get new business," says Harsh Roongta, chief executive officer, Apnapaisa.com.
Another option is to clear your debts. The bank is not interested in the asset's ownership and will expect repayment from both the parties. Hence, both can sell the asset to repay the loan. Ensure that the co-borrowed loan is against a co-owned property
as the sale proceeds will go the person in whose name the property is registered. If not, get the ownership changed. Alternatively, one of you can take an additional loan, buy out your spouse and transfer the asset in your name.
Your banking issues do not end here. The savings accounts, the bank locker, the demat account, everything that's joint has to be closed.
If the joint account
is the primary savings account of one spouse, he/she can get it converted into a single account. This can be easily done with the consent of both the holders.
Joint demat accounts, however, have to be closed. Any holdings in the account can either be liquidated or transferred to the new single accounts with the consent of both. For lockers, both have to be present at the bank's branch to complete the surrender formalities; subsequently, new single-holder lockers can be hired.