Written by Barb Miller, Certified Financial Counselor and Bankruptcy Specialist with LSS Financial Counseling
As we all know, financial problems and stress often lead to relationship problems. Sometimes, couples are able to work through issues together and sometimes they are not. If they can’t, the couple may be headed for divorce court. In a divorce, a judge will typically divide the assets and debts incurred during a marriage. Or, couples may arrive at an agreement over property matters that are formalized by a court order. The whole point of this blog is to point out that when a couple owes debts together, a divorce decree cannot change who is liable in the eyes of the creditors.
Let’s look at an example. Sue and Joe recently divorced. Their divorce decree states that Sue, who earns a higher income, will pay the balances owed on their four joint credit cards. Since Sue wants to stay in the house with the kids, the decree also states she will be responsible for paying the joint mortgage going forward.
Several months go by and Sue stops paying on the credit cards so she can cover the housing costs on her own. Joe starts getting phone calls from all the credit card companies. He explains that the divorce court ordered Sue to pay the bills so he is not responsible for them. The company representatives correctly state to Joe that they were not parties to the divorce, the credit contract includes both of them, and therefore Joe is legally liable for the joint debts. Joe later discovers that the missed payments showed up on his credit report.
What you need to understand is that a divorce decree really only holds power in a divorce court. What I mean by that is if your ex decides to blow off what the court ordered, or for some reason can no longer afford to make the payments, your only recourse is to bring the matter before the divorce court again. Legally, if you have joint debts at the time of the divorce, you are both responsible to pay.
Types of Debts: Individual, Joint, and Authorized Users
1. Individual Account: When you open a credit account individually, your income, assets, and credit history will be reviewed by the creditor. You alone are responsible for repaying the debt, whether you are single or married.
The good thing about individual accounts is that if you handle your debts responsibly, you will have a solid credit rating. That means no one else can negatively affect your credit score like Sue did to Joe in our example above.
The down side is if you are married but do not work outside the home, or only work part-time, you may not have a strong enough credit rating to get credit on your own. In that case, you may need a joint account with your spouse so his/her income can be part of the picture that creditors consider.
2. Joint Account: When you seek credit jointly, a creditor must consider the income, assets, and credit history for you and your spouse. This means you are both considered legally responsible to make sure the debts are repaid. When the payment history is reported to the credit bureaus for joint accounts, it must be reported in both names.
The upside of applying for credit jointly is that together, your financial information may be stronger than if you applied for credit individually.
But the downside is you are both legally responsible to pay the debt. Even if a divorce decree orders one spouse to pay joint debts, if that spouse fails to do so, it will definitely hurt the other’s credit score. Even more important to understand is that the creditors have the legal right to pursue payment from both spouses, and pursue they will. Although you may be able to take your ex back to divorce court for some relief, that will not, and cannot stop the creditors from taking action to collect from both of you. That may lead to phone calls, threatening letters, lawsuits, and wage garnishment that you never expected!
3. Authorized Users: When you open an individual account, you can authorize others to use it. The account information and status will also be reported on the user’s credit record.
This typically occurs when the user may not be able to get his/her own credit because she is a young student or is not working. Keep in mind that while authorized users can use your account, only you, not them, are legally responsible to pay the debt.
The Community Property Exception:
You should also be aware that if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), and you are married but open individual credit accounts, your spouse may also be legally responsible for these debts. In addition, the individual debts of one spouse may also appear on the other spouse’s credit record.
What to do if you are divorcing or thinking of divorce:
First, get copies of your credit reports from www.annualcreditreport.com to identify all your debts and make sure your spouse has not been racking up debt in your name. If you don’t have internet access, call 877-322-8228 to order your credit reports by phone.
Next, make sure you know the type of accounts you have, individual or joint. If you live in a community property state (see paragraph above), verify with a family law attorney whether or not your spouse is also responsible for your individual debts, or you are responsible for his. Then, stay current on payments to protect your credit rating.
If you divorce, consider closing any joint accounts or those where your ex was an authorized user. A creditor can close a joint account at the request of either spouse. You surely do not want any unpleasant surprises, such as new charges on your credit card.
You could also ask the creditor to convert a joint account to an individual account. However, a creditor is not required to do so and you may have to reapply for individual credit. In this case, your application may be denied if your credit record is not very strong.
Joint Mortgage Loans or Home Equity Loans: Often, just like in our example above, one spouse or the other wants to stay in the marital home. Generally, mortgages and home equity loans are issued jointly to both spouses. Just like with credit cards, a divorce decree cannot change who is legally responsible to pay the debt.
To get out from under a joint mortgage or home equity loan, the spouse who wants the home must qualify to refinance the loan in his/her name alone. To do so will require not only a good credit rating, but also adequate income to meet the financial obligation.
When faced with a financial situation like this a person can’t help but think…what’s next? Consider your options with LSS–for free. Our certified financial counselors can help you understand your options with debt. We are here to help you look ahead. Call us today at 877.577.2227 or visit our website at ConquerYourDebt.org.