Divorce and Credit-How it Truly Effects You
Few things in life can be as complicated and messy as divorce and credit. If you’ve recently divorced or are going through a divorce, one of the important issues that you will have to settle is how any joint debts are to be handled. This not only includes mortgages on a jointly owned home but any joint credit cards or loans that you have. Splitting financial responsibilities is a major part of divorce and there are a lot of different aspects to consider. The focus of this article will be specifically on credit cards since that is probably one of the most confusing financial obligations to address throughout the divorce process.
Individual vs Joint Accounts
There are two kinds of credit card accounts – individual and joint – and each is seen differently in terms of credit history. Don’t assume that just because you have a credit card with your name on it the account was a joint account. The account holder of an individual account may designate ‘authorized users’ and issue cards in their name, but the account holder is still the responsible party for the payment of the bill.
If you authorize a user on an individual account, the account may show up on both your credit report and theirs. If you have a joint account, it will appear on both of your credit reports. If you divorce, you are both equally responsible for any bills on joint accounts. You may also be responsible for any bills on individual accounts held by your ex-spouse if you live in a community property state.
Credit companies are obligated to close or freeze a joint credit account at the request of either holder on the account, but they may not close the account without that request.
How to Protect Yourself
To protect yourself in case of divorce, financial advisors recommend the following:
- Freeze all joint credit accounts immediately. This will prevent the credit cards from being run up further and hurting your credit. It is not uncommon is situations where the divorce is less than amicable for one spouse to make a lot of purchases to drive up the debt they believe the ex spouse will have to pay back. Most creditors will not close an account with an outstanding balance, but will freeze it at your request.
- Remove your ex-spouse as an authorized user from any individual account that you hold. It’s important that only you will have the authorization to charge items on your individual accounts. This will help protect your accounts, and will ensure that you have your own credit after the divorce.
- Ask credit card companies to convert joint accounts to individual accounts in the name of the person who will be responsible for paying them. The credit card company is not obligated to do this. They may require that the balance be paid in full, or that the individual apply for credit in his or her own name, and then transfer the balance.
Allocate the Debts for Repayment Responsibility.
You also need to be aware of how failure to pay those debts on time will affect your credit rating – even if your divorce decree states that you are not the party responsible.
The best way to allocate debts is for each of you to agree to be responsible for repayment in full of specific accounts. Be aware that any agreement between the two of you is not binding to a third party – the credit card company. If your ex-spouse agrees to pay a joint account and then defaults, it is still legally your responsibility to the credit card company to pay it. You ARE entitled by law to sue your ex-spouse for that money – but few ex-spouses do.