Dividing Debt and Protecting Credit Scores in Divorce

During the marriage, you and your spouse may have opened several lines of credit to support your life. New cars, education, and homebuying are typical reasons to get loans. You may have also opened joint credit card accounts.

But in a divorce proceeding, each person will walk away with a separate share of property. As with splitting a savings account or personal belongings, you’ll also divide marital debt. Understanding the different types of debt and credit accounts opened during a marriage may help you prepare.

See answers to frequently asked questions below:

• Who Is Responsible for Debt in Divorce?
• How Does Divorce Affect My Credit Score?
• Can I Open a New Credit Card During Divorce?
• Should I Pay Off Debt Before Getting a Divorce?
• Can a Divorce Protect Property From Creditors?
• Can I Sue My Ex-Spouse for Hurting My Credit Score?
• How Do I Protect My Credit in Divorce?

Who Is Responsible for Debt in Divorce?

You will be responsible for any debt the final divorce order assigns to you. In all states, you would keep any separate property and debts. If you have a prenuptial agreement, it may specify the division of certain debts. The remaining debt division depends on the type of marital property laws your state follows.

If you live in a community property state, you and your ex-spouse will likely divide marital debt equally. This debt can include car loans and mortgages in both of your names. It may also include some student loans. Arizona, Washington, and Wisconsin are examples of states that divide property equally.

If your state follows the common law equitable distribution rules, the judge will divide the marital debt as fairly as possible. The judge considers each spouse’s overall financial situation. One party might receive more debt than the other.

There are two types of credit accounts: individual accounts and joint accounts. Yet, what the court orders can differ from what creditors see. If your name is on an account, you could later be liable for that debt.

What Happens to Debt in Individual Accounts?

Individual debt from accounts opened before the marriage generally stays with the account holder after the divorce. Accounts that only one spouse opens during the marriage are often marital debt.

In community property states, individual accounts opened during the marriage may be both parties’ responsibility. In equitable distribution states, a judge may consider factors like who opened and benefitted more from the loan or credit line. That person may be responsible for a higher share of it.

The credit card debt and personal loans you had in your own name would be separate debts. If you open a line of credit in your name and are solely responsible, no one else's actions can negatively affect your credit record. Whether married or single, you pay the debts on your accounts alone.

A court may also reclassify individual debt as marital debt in some cases. Every divorce is unique, so you may want to ask your lawyer about your separate debts.

What Happens to Debt in Joint Accounts?

In a joint account, you and your spouse are liable for the debt regardless of who ran up the charges. Shared account liability exists even if a divorce order assigns separate debt obligations to each spouse.

A mortgage is a typical example of joint debt for many couples. Splitting a house in divorce can be complicated. Only one person might keep the property, but both people are still responsible for paying the joint mortgage from the lender’s perspective. Refinancing the mortgage to remove one spouse is a common solution.

A creditor who reports a joint account to credit bureaus must report it in both spouses’ names. Joint debt could impact your credit score in divorce. Former spouses who run up bills on jointly held accounts and don't pay them would hurt their ex-partner's credit histories.

Is an Authorized User Responsible for Credit Card Debt?

Normally, authorized users are not liable for paying the bills on their spouse’s credit card. The bill is ultimately the account holder’s responsibility, even if you are married. The authorized user’s spending becomes the primary cardholder’s debt, which can appear in both spouses’ credit reports.

However, a divorce decree could change how spouses divide the marital debt from credit cards. That’s how the authorized user might assume responsibility for part or all of the balance. Being an authorized user doesn’t fully shield you from debt in divorce.

When starting a divorce, it’s often a good idea to contact the credit card issuer to remove authorization. This step does not change any marital debt to individual debt in the eyes of the court. Rather, it can help both parties begin living separate financial lives.

How Does Divorce Affect My Credit Score?

Divorce itself does not affect your credit score. But the divorce process could hurt your credit unless you take the proper precautions.

Many factors can shape your credit score, including:

• Payment history: whether you make payments in full and on time
• Credit history length: the age of the oldest account on your credit report
• Credit utilization: how much credit you currently owe compared to your available credit
• Credit mix: the variety of credit types you have, such as credit cards, car loans, and student loans

Just like during a marriage, changing these factors during a divorce could raise or lower your credit score. For instance, the extra stress or conflict might lead to missed payments, affecting your payment history. That’s why you should carefully manage your finances throughout the divorce process.

The judge will give a divorce decree to specify who is responsible for which accounts opened during the marriage. But this decree doesn't bind the lenders or credit card companies. You may still be responsible for an account that has your name on it.

Can I Open a New Credit Card During Divorce?

Yes, a pending divorce doesn’t stop you from getting your own card. Opening a new credit card can be a smart first step toward separating your finances during and after divorce.

Should I Pay Off Debt Before Getting a Divorce?

Yes, it’s a good idea to pay shared debts if possible. Paying off or reducing as much of your joint debt before the divorce proceedings begin can simplify the division process.

Be careful about using money from a joint bank account to pay individual debts. Your divorce attorney can help you evaluate how to manage debt. Smart planning may prevent legal trouble and financial disadvantages.

If paying off debt isn’t possible, stop using joint credit cards for new purchases. You can at least minimize the amount of debt to divide.

Can a Divorce Protect Property 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 missed payments and unpaid credit card balances. They will also report your credit history to a credit bureau.

Unlike divorce, filing for bankruptcy may offer certain protections against creditors and debt collectors. If you are considering bankruptcy, also consider the timing around a divorce. There are benefits and drawbacks to filing as a married couple versus as a single individual.

Can I Sue My Ex-Spouse for Hurting My Credit Score?

Depending on your situation, you may hold a former spouse accountable for an underlying financial issue. However, not all scenarios causing credit damage involve a lawsuit. Court intervention may be necessary for some cases, while others call for a different solution.

If an Ex Hides Accounts or Manipulates You

Financial abuse or manipulation during the marriage can affect the divorce outcome. Furthermore, spouses can’t lie about debt or hidden funds to get a better property award.

These issues are usually addressed in the divorce lawsuit itself. If you discover deception after the divorce, you might appeal the divorce decree instead.

The judge may award a higher amount of net assets to a spouse who suffered financial abuse. Likewise, a judge may penalize financial dishonesty by awarding fewer net assets to a spouse who hid the truth. After the divorce, these assets may help you rebuild your credit.

If an Ex Doesn’t Pay Debt or Support

A spouse’s failure to pay joint debt could hurt your credit score directly if you don’t take precautions. This is why the divorce process involves separating all financial accounts.

Nonpayment of court-ordered child support and alimony can also hinder your ability to pay bills. Your credit could suffer if nonpayment persists. However, one spouse's failure to keep up payments will not relieve the other from paying their own obligations.

You may take legal action to enforce court orders for alimony, child support, or property division. Sometimes, a court garnishes the ex-spouse’s wages to make up for what they didn’t pay. Acting quickly to involve the court can help minimize the financial impact of unpaid support or debt issues.

If an Ex Opens Accounts In Your Name

If a former spouse opens new accounts using your personal information, it is identity theft. Using someone else’s details to open or use credit is fraud.

Suing an identity thief is technically possible in some states. Yet, you might be able to more easily resolve the problem by reporting identity theft.

This process tells creditors to remove all fraudulent accounts from your credit report. It also involves filing a police report. You can freeze your credit and set up free credit monitoring to prevent further damage.

How Do I Protect My Credit in Divorce?

The financial implications of divorce may affect credit scores. A poor credit rating can make settling into your new life difficult.

The following tips can help you maintain good credit as you move forward. However, consulting with a divorce attorney is wise before you make significant financial decisions.

Close Joint Accounts

Close joint accounts after opening your own bank accounts and credit cards. Closing a joint credit card may temporarily lower your credit score, but maintaining your own card can reverse it over time.

A creditor cannot automatically close a joint account because of a change in marital status. But they can close it at the request of one of the divorcing spouses.

You can also ask the creditor to convert these accounts to individual accounts. A creditor does not have to change joint accounts to individual accounts. Instead, they may ask you to reapply for credit individually. Then, based on your new application, you may extend or deny credit.

For a mortgage, auto loan, or home equity loan, a lender will likely request that you refinance the loan to remove a spouse from the obligation. Refinancing can come with other changes, such as new interest rates, so review their terms first.

Get Your Free Credit Report

Credit institutions offer free yearly credit reports. 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. AnnualCreditReport.com is a federal resource that shows reports from the three major credit bureaus: Experian, TransUnion, and Equifax.

A few things to check in your credit report include:

• What debts you have and their balance
• Which accounts and debt get reported
• Whether your ex made late payments or is behind on joint accounts
• Any accounts you don’t recognize

If you live in a community property state, you should also understand all the debts your ex incurred during the marriage, even if your name was never used on the loan or credit application. The court considers any debt during the marriage yours as much as theirs.

Divide and Transfer Credit Card Debt

Promises that one spouse will eventually pay off shared credit card debt can be unreliable. Instead, take the step to divide joint credit card debt.

Divorcing couples sometimes use a balance transfer to move debt to each spouse’s separate card. In the creditors’ eyes, you would no longer share the responsibility to pay your ex’s portion.

Then, cancel the joint cards as soon as possible. This step stops your shared credit card debt from growing. Cancelling will remove your name and credit from that account.

Put an Indemnity Clause in Your Divorce Agreement

Consider including an indemnification clause in your divorce agreement. This clause explains which spouse owes on the debt. It clearly notes that the other spouse is not responsible.

The indemnity agreement will allow you to take your ex-spouse to court if they default on the debt. Talk to your divorce attorney about adding an indemnity clause to your settlement agreement.

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 which debt after the marriage. Divorce could affect your credit history, as well.

You don't need to answer these questions on your own. Get legal advice and know your rights. A local divorce lawyer or family law attorney can help set your mind at ease.