Quick Facts on Divorce and Credit
Your divorce and credit is not something people think about normally at the start of the divorce process. Credit is not something that someone considering a divorce usually thinks about. Divorce is never easy, and going through all of the household finances will undoubtedly be stressful. Understanding the different kinds of credit accounts opened during a marriage may help eliminate some of that stress and ensure you do not end up with negative marks on your credit report unexpectedly.
Your divorce does not relieve you from any joint credit card debt you may have had while you were married. You are responsible for joint accounts from any credit cards you may have along with car loans and home mortgages. Even if a divorce judge orders your ex spouse to pay a certain credit card bill, you are still legally responsible for making sure that this bill is being paid. If not, your credit can be ruined.
Let’s look at an example. Bill and Susie 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 Susie for payment. She referred them to the divorce decree, insisting that she was not responsible for the accounts. The creditors correctly stated that they were not parties to the decree and that Susie was still legally responsible for paying off the couple’s joint accounts. Susie later found out that the late payments appeared on her credit report.
Individual or Joint Account
There are two types of credit/loan accounts: individual and joint. You can permit authorized persons to use the account with either. When you apply for credit, whether a charge card or a loan. you’ll be asked to select one type.
Your income, assets, and credit history are considered by the creditor. Whether you are married or single, you alone are responsible for paying off the debt. 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.
If you’re not employed outside the home, work part-time, or have a low-paying job, it may be difficult to demonstrate a strong financial picture without your spouse’s income. But if you open an account in your name and are responsible with the account, no one can negatively affect your credit record.
Your income, financial assets, and credit history – and your spouse’s – are considerations for a joint account. No matter who handles the household bills, you and your spouse are responsible for seeing that debts are paid. 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 present a stronger case to a creditor who is granting a loan or credit card. Because two people applied together for the credit, each is 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 may 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 your name (if the account was opened after June 1, 1977). A creditor also may report the credit history in the name of any other authorized user.
Authorized users are often added to accounts 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, you – not they – are contractually liable for paying the debt.
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, it’s important 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. One missed payment can have a negative effect on your credit report, These negative effects can last up to seven years on your report.
The bank, credit card issuer, mortgage company or other credit lending businesses that you have and account with also has the legal right to report any negative information to a credit bureau if your ex pays late on a joint account. If your ex decides that he or she does not want to pay the bill at all, you will probably have to pay and you will likely find creditors or collections agents calling if you do not.
If you divorce, you may want to close joint accounts or accounts in which your former spouse was an authorized user. You can also as the creditor to convert these accounts to individual accounts or remove the former spouse as an authorized user.
By law, a creditor cannot close a joint account because of a change in marital status, but can do so at the request of either spouse. A creditor, however, does not have to change joint accounts to individual accounts. The creditor can 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 or home equity loan, a lender is likely to require refinancing to remove a spouse from the obligation.
The easiest way to find out what kind of accounts you and your spouse owe is to get a credit report. You should be checking your reports at least once per year. Before COVID-19, everyone was entitled to one free copy of their report per year however, the rules are currently relaxed and you can view your credit reports once per week. It is unknown how long this will be in effect, so be sure to check with each bureau on their current restrictions. At any time, you can pay for a report.