Credit and Divorce
Mary and Bill recently divorced. Their divorce decree stated that Bill would pay the balances on their three joint credit card accounts. Months later, after Bill neglected to pay off these accounts, all three creditors contacted Mary for payment. She referred them to the divorce decree, insisting that she wasn't responsible for the accounts. The creditors correctly stated that they were not parties to the decree and that Mary was still legally responsible for paying off the couple's joint accounts. Mary later found out that the late payments appeared on her credit report.
If you've recently been through a divorce proceeding or are contemplating one, you may want to look closely at issues involving credit and divorce to avoid the situation above. Furthermore, understanding the different kinds of credit accounts opened during a marriage may help illuminate the potential benefits and pitfalls of each.
Does Divorce Hurt Your Credit? Will Your Credit Score Go Down?
Divorce, by itself, does not affect your credit score. Rather, the divorce process, which often involves joint credit accounts, may affect your credit unless you take the proper precautions.
The judge gives a divorce decree, which specifies who is responsible for accounts opened during the marriage. However, this decree doesn't bind the lenders. This means you may still be responsible for an account that has your name on it.
Types of Credit Accounts and Responsibility for Debt
There are two types of credit accounts: Individual accounts and joint accounts. You can also permit authorized persons to use your account when you apply for credit.
The creditor considers your income, assets, and credit history. Whether you are married or single, you alone are responsible for paying off the debt in your individual account. The account will appear on your credit report and may appear on the credit report of any "authorized" user.
However, if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), you and your spouse may be responsible for debts incurred during the marriage, and the individual debts of one spouse may appear on the credit report of the other.
Having an individual account may have a negative impact if you're not employed outside the home, work part-time, or have a low-paying job. This is because it may be challenging to show a strong financial picture without your spouse's income.
On the other hand, if you open an account in your name and are responsible, no one else's actions (or nonpayment) can negatively affect your credit record.
Your and your spouse's income, financial assets, and credit history are considerations for a joint account. In a joint account, both you and your spouse are responsible for seeing that debts are paid no matter who takes care of the bills. A creditor who reports the credit history of a joint account to credit bureaus must report it in both names (if the account was opened after June 1, 1977).
An application combining the financial resources of two people may show creditworthiness to a creditor who is approving a loan or credit card.
But because two people applied together for the credit, both are responsible for the debt. This is true even if a divorce decree assigns separate debt obligations to each spouse. Former spouses who run up bills and don't pay them can hurt their ex-partner's credit histories on jointly-held accounts.
If you open an individual account, you can authorize another person to use it. If you name your spouse as the authorized user, a creditor who reports the credit history to a credit bureau must report it in your spouse's name as well as in yours (if the account was opened after June 1, 1977). A creditor may also report the credit history in the name of any other authorized user.
User accounts are often opened for convenience. They benefit people who might not qualify for credit on their own, such as students or homemakers. While these people may use the account, they are not contractually liable for paying the debt.
Credit and Divorce: What Happens If You Divorce?
If you're considering divorce or separation, pay special attention to the status of your credit accounts and how your credit and divorce are linked. If you maintain joint accounts during this time, it's essential to make regular payments so your credit record won't suffer. As long as there's an outstanding balance on a joint account, you and your spouse are responsible for it.
Will Getting a Divorce Protect Assets From Creditors?
No. As stated earlier, any divorce decree by a judge does not extend to creditors. That means creditors can come after you for any missed payments and any unpaid credit card balances. They will also report your credit history to a credit bureau.
Should You Pay off Debt and Credit Cards Before Getting a Divorce?
Yes! If possible, it is best to pay off or reduce as much of your joint debt before the divorce proceedings begin, or at least as part of the divorce proceedings. If that is not possible, stop using joint credit cards for new purchases.
Tips to Prevent an Ex-Spouse From Ruining Credit During or After a Divorce
Divorce by itself can be very hard. But it's important to start thinking about the financial implications, especially when it comes to credit scores. The following tips can help you maintain good credit as you start to move forward in life.
1. Close Joint Accounts Early
You may want to close joint accounts or accounts in which your former spouse was an authorized user. You can also ask the creditor to convert these accounts to individual accounts.
A creditor cannot just close a joint account because of a change in marital status but can do so if one of the divorcing spouses requests it. Even so, a creditor does not have to change joint accounts to individual accounts.
Instead, they may require you to reapply for credit on an individual basis and then, based on your new application, extend or deny you credit. In the case of a mortgage, auto loan, or a home equity loan, a lender is likely to require refinancing to remove a spouse from the obligation.
2. Get Your Credit Score From a Credit Reporting Institution
Credit institutions offer free yearly credit reports, and there's no better time to get one than when you are going through a divorce or have concerns about an ex's debt repayment. Learn what debts you have, what has been reported, and whether your ex is behind on payments for joint accounts.
If you live in one of the community property states, you need to understand all of the debts your ex incurred during the marriage, even if your name was never used on the loan or credit application. Any debt incurred during the marriage is considered yours as much as theirs.
3. Divide and Transfer Credit Card Debt
Rather than simply stating that one spouse will pay off the credit card debt, actually take the step to divide the debt on joint credit cards and transfer it to the spouse responsible for it. Then, cancel the joint cards as soon as possible.
4. Include an Indemnity Clause in Your Divorce Agreement
If only one spouse is to be responsible for a jointly-owned debt, you should consider including an indemnification clause in your divorce agreement. This clause explains which spouse owes on the debt, and clearly notes that the other spouse is not responsible.
Should your spouse refuse to pay a debt listed under their name in the indemnification clause, you can sue them for it.
Get Professional Legal Help With Your Credit and Divorce Questions
Your credit score is a vital part of your financial health. If you're contemplating a divorce, you'll want to understand who will carry the bulk of the debt after the marriage and how this could impact your credit history. You don't need to try and answer these questions on your own, however. A local divorce lawyer will be able to set your mind at ease.