Consider the following scenario: Mary and Bill recently divorced. Their divorce decree stated Bill would pay the balances on their three joint credit card accounts.
Months later, after Bill neglected to pay off these accounts, all three credit card companies contacted Mary for payment. She referred them to the divorce decree, insisting she wasn't responsible for the accounts.
The creditors correctly explained that they were not parties to the decree. Mary was still legally responsible for paying off the couple's joint accounts. Mary later discovered that the late payments appeared on her credit report.
If you've recently been through a divorce proceeding or are contemplating one, look closely at issues involving marital debt and divorce. You can avoid the situation above. Understanding the different types of debt and credit accounts opened during a marriage may help.
Community Property or Equitable Distribution State?
Division of debt in a divorce depends on the type of marital property laws your state follows. If you live in a community property state, marital assets, and debt get divided equally between you and your ex-spouse. This will include car loans and mortgages in both of your names. It may include some student loans.
States that recognize community property are:
If your state follows the common law equitable distribution rules, the judge will divide the marital debt as fairly as possible. This does not mean the debt and assets get divided equally. When considering the property division and assignment of debt, the judge may consider the financial situation of each spouse.
But like Mary and Bill, if your name is on the account, you could later be liable for that debt. Failure to pay on a spouse's credit card will impact both parties' credit scores.
One spouse's failure to keep up payments will not relieve the other from paying their own obligations. This includes child support and alimony or spousal support.
In all states, separate property is still separate. And any prenuptial agreement will supersede state laws on property division.
Does Divorce Hurt Your Credit? Will Your Credit Score Go Down?
Divorce, by itself, does not affect your credit score. Instead, the divorce process may affect your credit unless you take the proper precautions.
The judge gives a divorce decree specifying who is responsible for which accounts opened during the marriage. This decree doesn't bind the lenders. You may still be responsible for an account that has your name on it. The individual debts of one spouse may appear on the credit report of the other.
Types of Credit Accounts and Responsibility for Debt
There are two types of credit accounts: individual accounts and joint accounts. You can also allow authorized persons to use your account when you apply for credit.
Any credit card debt and personal loans each of you had in your own name before the marriage should be separate debts. These are your accounts alone. Whether married or single, you pay the debts on your accounts alone. The account will appear on your credit report and may appear on the credit report of any "authorized" user.
Having an individual account may negatively impact if you're not employed outside the home, work part-time, or have a low-paying job. It may be challenging to show a strong financial picture without your spouse's income.
If you open an account in your name and are responsible, no one else's actions 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, you and your spouse are responsible for paying the debt regardless of who ran up the charges. 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).
The combined financial resources of two people may show creditworthiness to a creditor who is approving a loan or a 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 and 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, 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. If you maintain joint accounts during this time, you must 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.
Keep track of spending on these accounts. A court will not look favorably on a party who abused these credit accounts after your separation.
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 missed payments and 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 challenging. But considering the financial implications, especially for credit scores, is important. 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 in life.
1. Close Joint Accounts
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 close a joint account because of a change in marital status but can do so if one of the divorcing spouses requests it. 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.
2. Get Your Credit Score From a Credit Reporting Institution
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. Learn what debts you have, what gets reported, and whether your ex is behind on payments for joint accounts.
If you live in a community property state, you must 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 incurred during the marriage to be yours as much as theirs.
3. Divide and Transfer Credit Card Debt
Rather than stating that one spouse will pay off the credit card debt, 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. This will remove your name and credit from that account. It may save you a headache later on.
4. Include 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 most of the 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 will set your mind at ease.