The Doctrine of Exoneration is a principal of law that occasionally crops up, usually in bankruptcy. It is one of the few ways that a spouse can get an equitable share of the family home in the event of the other spouses bankruptcy.
A typical scenario is that a couple uses equity in a property to consolidate debt of that incurred in only one parties name. This can be applied to a people who have a joint mortgage and one party refinances their share of the property to pay out the debts of the “other party”. The most important thing is that the money must be for the sole benefit of the “other party”. If both parties obtain a benefit from the refinancing then the Doctrine doesn’t apply.
The idea is that a loan only for the benefit of “other party” should be paid out of their share of the debt. If there was any subsequent shortfall that the original party would take care of this.
Example: Mr. X and his wife own a house. They borrow $25,000 for Mr. X to build a business which Mrs. X has no direct financial interest.
For the Doctrine to apply it needs to be shown that Mrs X did not recieve a benefit from the loan. The $25,o00 used in Mr. X’s business was used only for the benefit of Mr. X and therefore falls under the doctrine.
Unless there is sufficient equity in the bankrupt parties share to pay out the debt, any equity that the other party would otherwise have received after a 50/50 split of the equity (or as appropriate) can’t be touched.
Example:
Jack and Jill own a house worth $200,000. Jack borrows $150,000 on credit cards in his name to set up his water delivery business, which Jill has no financial interest in. To reduce the interest the couple consolidate the debt into the house. Soon after plumbing is installed in the town and Jack goes bankrupt. The Doctrine won’t prevent the property from being sold however it does affect how much each party gets. The house sells for $200,000. How much money does Jill get?
At first glance in might appear that:
The property is sold for $200,000 minus the $150,000 for the debt = $50,000
The $50,000 is split evenly between the Jack and Jill. So Jill gets $25,000.
However!
Jack and Jill are each entitled to a $100,000 share. Jack owes $150,000. Since Jill had no interest in the business the loan will be taken from Jacks share first. $100,000 – $150,000 = $50,000. This $50,000 will then be taken out of Jill’s share as she is responsible for the shortfall under the Doctrine of Exoneration. $100,000 – $50,000 = $50,000.
Jack gets $0, Jill gets $50,000.
Couples should carefully consider debt consolidation. In the above example if the above example Jill would have walked away with $100,000 rather than $50,000. The creditors would not have been able to pursue Jack for more than his share of the equity
