You would think something so common would be easier to manage, yet can cause long-term obstacles when not handled properly.
Many things affect a person when going through a divorce. Emotions are in turmoil. Finances are up in the air. Housing, children, social connections, and much more. While the division of assets and debt may seem commonplace in a divorce, sometimes having a deeper understanding of the intricate details of something that seems so common may shed light on what seems so simple - existing consumer debt.
When divorce is present it is important to understand what happens to the liability for credit card debt in divorcing situations. In a divorce, the extent of a party’s liability for credit card debt may depend on:
- whether they live in common law or community property state.
- whether the debt is for a joint credit card, and who the debt is assigned to in the divorce.
- who the debt is assigned to in the divorce.
Credit Card Liability in the Common-Law States
The majority of states follow the common law rules when dividing property and debt in a divorce. These are referred to as common law states or equitable distribution states. In a common-law state, you are generally liable for all debts in your name. This means that if you took out a credit card in your name or if you cosigned on it, then the creditor can come after you to collect the debt. As a result, after divorce, you can be held liable for all individual or joint credit cards as long as your name is on them. However, in most cases, you are not liable for any credit card debt owed solely by your spouse.
Special Rules for Community Property States
When it comes to property distribution and debt allocation, certain states follow community property laws rather than common law. In a community property state, most debts incurred by either spouse during the marriage (but not before or after marriage) are considered community debts. Both spouses are held equally liable for community debts even if only one spouse incurred the debt.
This means that, if living in a community property state, one may be on the hook for a credit card even if it is in the other spouse’s name only. However, each state also considers different factors when determining if an obligation is a community debt. Generally, if the credit card was used for something that benefited the marital community, it will be community debt regardless of who incurred the charges. But if one spouse used his or her own credit card to buy something that did not benefit the marriage, there is a greater chance it will not be considered a community debt.
What Happens If the Debt Was Assigned to A Specific Spouse in the Divorce?
The first thing to note is that credit card companies are not bound by the terms of the divorce decree or a family court order assigning the debt to a specific spouse. This is because when the credit card was obtained, either one party or both entered into a contract with the credit card company. A family court judge does not have the power to alter the credit card company’s rights under the contract.
As a result, even if a debt was assigned to one spouse in the divorce, the other spouse will still be liable for it if their name was on the account, were a cosigner, or it was a community debt (although it is less likely that a credit card company will pursue an assigned party based solely on community debt liability if it was the other spouse’s card).
However, if one spouse is ordered to pay a credit card in the divorce but fails to do so, he or she will be in violation of the divorce decree or court order. In that case, the other spouse will usually be entitled to reimbursement or damages from the ex-spouse if the other party ends up having to pay the debt.
Divorce and the Credit Report
Many divorced couples run into financial problems a few months after a divorce when an ex-spouse starts making late payments on a shared account. These late payments appear on both of the account holders’ credit reports, despite divorce decrees. Once the records appear on your credit report, it will show a negative status for those accounts that were not paid on time or simply, not paid at all.
In order to avoid these issues, divorced couples should close or refinance all shared accounts if at all possible. Any shared credit cards, loans, and mortgages will continue to be a joint responsibility until you work directly with the financial institution to resolve the issue.
Not only can divorce lead to emotional strain, but it can also cause all sorts of financial problems. All those shared accounts and co-signed loans that once seemed so romantic are now the cause of the major issue. The following important tips can help avoid financial damages that will show up on your credit report and stay on your report there for years to come.
Managing Shared Accounts—It is not always possible to close or refinance all your shared debts after a divorce. Mortgages and large loans can be difficult to refinance quickly. In this situation, it is important that you and your ex-spouse work together closely to manage a shared account. Remember, your credit will be damaged if your ex-spouse cannot manage the shared account responsibly, and vice versa.
One of the easiest ways to manage a shared debt with an ex-spouse is by setting up an online account. This way, you can both easily log in to check on the payment status of the loan. If you see that the debt has not yet been paid for the month, you can contact your ex-spouse or decide to pay the bill yourself in order to avoid late payment and damage to your credit score. Encourage your ex-spouse to sign up for automatic payments that will deduct the bill from his or her accounts each month.
An ex-spouse with bad credit may decide to ruin his or her former spouse’s credit by not paying a shared account. Keep in mind that negative reporting, such as charge-offs, liens, judgments, bankruptcy filings, foreclosures, and repossessions related to shared accounts can also appear on both account holders’ credit reports. It is advisable to continue working with your ex-spouse to manage your shared finances after a divorce when at all possible.
While the majority of divorcing couples have an understanding of credit, unfortunately, there are still those whose spouses ‘took care of all that stuff and they truly do not have the experience of working with credit and bill paying. This goes without saying; however, the majority of times this spouse was the wife. Keep reading below to learn how to properly manage credit during a divorce.
Understanding the Makeup of Your Credit Score is the First Step Toward Managing Credit During Divorce
As you might expect, payment history is the most influential component and this is followed closely by the amounts owed. To a lesser degree, the length of time that you’ve utilized credit, the number of new accounts or inquiries that may have and the various types of credit accounts that you hold will also have an impact on your score.
The overall importance of any of these factors can be further influenced by the entirety of the information contained in your consumer credit report. As such, certain patterns, occurrences or items can be measured differently depending on any other factor or combination. There can be great complexity in the way that the scoring formulas work and it’s for this reason that they are difficult to assess.
Managing your credit prudently will include the obvious, yet at times, the opposite is also true. In an effort to effectively manage credit during divorce, always try and remember the following:
- Have and follow a system to assure that your bills are always paid on time.
- Avoid late payments or the excessive use of credit by establishing and maintaining a cash ‘cushion’ to pay for unexpected expenses or repairs. It’s actually better to have a high credit limit with a low balance than to ‘max out’ your cards.
- Never close old accounts as the age of these can actually help and if you shop for credit, keep it to the shortest time period possible so that multiple inquiries are not counted against you.
- You need to have credit experience to have a credit score so don’t be afraid to use it, just be sure to keep it within your means.
- If you have established credit, don’t open new accounts solely for the sake of earning a discount on your purchases as in the long run, this can cost you much more in higher interest rates than you may save upfront.
- As well, too many accounts mean too many payments and this increases both the task of making those payments along with the possibility of missing one.
If at all possible, it is advantageous for both spouses to work together in maintaining existing credit histories. There are numerous opportunities to maintain strong credit through a divorce.
Derogatory credit can significantly impact not only mortgage financing options; but insurance premiums, employment opportunities, and more.
A Special Note to Women
A good credit history often is necessary to get credit. This can hurt many married, separated, divorced, and widowed women. Typically, there are two reasons women don’t have credit histories in their own names: either they lost their credit histories when they married and changed their names, or creditors reported accounts shared by married couples in the husband’s name only.
If you’re married, separated, divorced, or widowed, contact your local credit reporting companies to make sure all relevant bill payment information is in a file under your own name.
National credit reporting companies sell the information in your report to creditors, insurers, employers, and other businesses that, in turn, use it to evaluate your applications for credit, insurance, employment, or renting a home.
Why It's Important to Get a CDLP™ Involved
Divorce Mortgage Planning is a holistic approach to evaluating mortgage options in the context of the overall financial objectives as they relate to divorcing situations. Working directly with the divorce team, a CDLP™ understands the intersection of divorce, tax, real estate, and mortgage financing. The role of the CDLP™ is to help integrate the mortgage selected into the overall long and short-term financial and investment goals to help minimize taxes, minimize interest expense, and maximize cash flow.
Involving a Certified Divorce Lending Professional (CDLP™) early in the divorce settlement process can help the divorcing homeowners set the stage for successful mortgage financing in the future.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations. The information contained in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education purposes.
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