When divorce is involved, understanding credit card debt liability is crucial. The extent of a party's liability for credit card debt depends on:
- Whether they live in a 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 Common Law States
The majority of states follow common law rules when dividing property and debt in a divorce. These are known 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 cosigned on it, 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
In certain states, community property laws govern property distribution and debt allocation. In a community property state, most debts incurred by either spouse during the marriage (but not before or after marriage) are considered community debts. Therefore, both spouses are equally liable for community debts even if only one spouse incurred the debt.
If living in a community property state, you may be responsible for a credit card even if it is in the other spouse's name only. However, each state 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 considered community debt regardless of who incurred the charges. But if one spouse used their own credit card to buy something that did not benefit the marriage, it is more likely that it will not be considered a community debt.
What Happens If the Debt Was Assigned to A Specific Spouse in the Divorce?
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. Therefore, a family court judge does not have the power to alter the credit card company's rights under the contract.
As a result, if a debt is assigned to one spouse in the divorce, the other spouse may still be liable if their name was on the account, they are a cosigner, or it was a community debt. However, it may be 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.
If one spouse is ordered to pay a credit card in the divorce but fails to do so, they may 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 they end 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 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.
To avoid these issues, divorced couples should close or refinance all shared accounts if 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.
Managing Shared Accounts Post-Divorce
It is not always possible to close or refinance your shared debts after a divorce. Mortgages and large loans can be challenging to refinance quickly. In this situation, you and your ex-spouse must work closely to manage shared accounts. Remember, your credit may be damaged if your ex-spouse cannot handle the shared account responsibly, and vice versa.
One of the easiest ways to manage shared debt with an ex-spouse is to set up online account access. You can easily log in to check on the loan's payment status. 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 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 their accounts each month.
An ex-spouse with bad credit may decide to ruin their former spouse's credit by not paying a shared account. Adverse 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. Therefore, it is advisable to continue working with your ex-spouse to manage your shared finances after a divorce when possible.
Working with a Certified Divorce Lending Professional
As a divorce mortgage planner, a Certified Divorce Lending Professional (CDLP® ) can help divorcing homeowners make more informed decisions regarding their home equity solutions while helping the professional divorce team identify any potential conflicts between the divorce settlement, home equity solutions, and real property issues.
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.
Conclusion
Understanding credit card debt liability during a divorce is essential to prevent financial complications. By working with a Certified Divorce Lending Professional, divorcing couples can navigate the complexities of debt allocation and mortgage planning more effectively, ensuring a smoother transition post-divorce.
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