Home loans, car loans, and joint EMIs do not disappear after divorce. Here is exactly how to handle them in your MoU — by Advocate Gaurav Rohilla, New Delhi.
One of the most overlooked aspects of mutual divorce settlement planning is what happens to joint financial liabilities — home loans, car loans, personal loans taken jointly, and credit card dues. A divorce decree dissolves the marriage but it does not automatically discharge either party from a joint loan agreement with a bank or financial institution.
If your Memorandum of Understanding (MoU) does not address joint loans specifically, you could find yourself legally liable for your ex-spouse's loan defaults years after the divorce is finalised.
A divorce decree is a court order between the two spouses. It is not binding on third parties such as banks and financial institutions. This means that even if your MoU says "the husband will pay the home loan EMI," the bank can still hold the wife equally liable if the husband defaults — because both names are on the original loan agreement.
The only way to fully protect yourself from a joint loan is to either repay it entirely, refinance it solely in one party's name, or get the bank to formally release one party from the loan agreement. A clause in the MoU alone is not sufficient protection against the bank.
This is the most complex and high-value joint liability in most divorce cases. Options to handle it:
The spouse retaining the vehicle should refinance the loan in their sole name. The MoU should specify which party gets the vehicle and who takes over the loan liability. If refinancing is not possible, the vehicle should be sold and the loan repaid from proceeds.
These are typically smaller amounts and should be repaid from the overall settlement amount before the divorce is filed. Outstanding joint personal loans should be cleared as part of the financial settlement rather than assigned to one party — this avoids future liability disputes.
Every joint loan must be specifically named and addressed in the MoU. A general clause saying "all financial matters are settled" is not sufficient and has been challenged in courts. The MoU should state for each loan:
Transfer of property between spouses as part of a divorce settlement is generally not treated as a taxable transfer under Section 47 of the Income Tax Act. However, subsequent sale of the property by the receiving spouse may attract capital gains tax. Consult a chartered accountant alongside your divorce lawyer for comprehensive advice on the tax implications of your specific settlement.
Yes. Unless you have been formally released from the loan by the bank, you remain a co-borrower and the bank can claim from you regardless of what the divorce MoU says. The MoU gives you a right to recover from your ex-spouse but does not protect you from the bank. This is why refinancing the loan into one party's name is the only complete solution.
If one party takes over the home loan, they can claim the full tax deduction under Section 24(b) for interest paid and Section 80C for principal repaid, provided they are the sole owner of the property and the sole borrower on the loan after refinancing. Joint tax benefits are available only while both names remain on the loan.
Yes. Having an ongoing home loan does not prevent you from filing for mutual divorce. However, the MoU must clearly address what happens to the loan and the property. Courts will scrutinise the property and loan settlement terms carefully, especially when children are involved and the matrimonial home is the primary asset.
Advocate Gaurav Rohilla's team drafts comprehensive MoUs that specifically address every joint financial liability — protecting you from future bank claims.