When facing divorce, it’s crucial to understand how credit card debt liability is managed. The extent of a party’s liability for credit card debt in a divorce depends on several factors:
- Whether they live in a common law or community property state.
- Whether the debt is for a joint credit card and who is assigned the debt in the divorce.
- Who the debt is assigned to in the divorce settlement.
Credit Card Liability in Common Law States
Most states follow common law rules when dividing property and debt in a divorce. These states are known as common law or equitable distribution states. In a common law state, you are generally liable for all debts in your name. If you took out a credit card in your name or cosigned on it, the creditor can come after you for 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, you are not liable for any credit card debt solely owed by your spouse in most cases.
Special Rules for Community Property States
Certain states follow community property laws for 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. Both spouses are held equally liable for community debts, even if only one spouse incurred the debt.
In a community property state, you may be responsible for a credit card even if it is only in your spouse’s name. Generally, if the credit card was used for something that benefited the marital community, it will be considered a community debt regardless of who incurred the charges. However, if one spouse used their own credit card to buy something that did not benefit the marriage, it might not be considered a community debt.
What Happens If Debt Is 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. 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 cannot alter the credit card company’s rights under the contract.
If a debt is assigned to one spouse in the divorce, the other spouse may still be liable if their name is 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. 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 encounter financial problems a few months after the 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’s not always possible to close or refinance 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 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 poor credit may decide to ruin their former spouse’s credit by not paying a shared account. Negative reporting, such as charge-offs, liens, judgments, bankruptcy filings, foreclosures, and repossessions related to shared accounts, can 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.
Why Work with a Certified Divorce Lending Professional (CDLP®)?
When financial and tax planning is part of the divorce settlement agreement, working with a Certified Divorce Lending Professional (CDLP®) is crucial. A CDLP® can recognize strategies and help divorcing borrowers avoid potential hurdles that may conflict with agency lending requirements.
- Expertise in Divorce Mortgage Planning: CDLP®s have specialized knowledge in handling the complexities of divorce-related mortgage issues.
- Comprehensive Financial Analysis: They provide detailed analysis and strategic recommendations, aligning with the homeowner’s financial goals and post-divorce plans.
- Collaborative Approach: CDLP®s work directly with divorce attorneys, financial planners, and real estate agents to ensure a cohesive plan addressing all aspects of the divorce and financial situation.
Ensure a Positive Outcome with Professional Guidance
Working with an experienced mortgage professional specializing in divorcing clients is essential. A Certified Divorce Lending Professional (CDLP®) can answer questions and provide excellent advice. Please don’t hesitate to reach out to me directly if you need additional information.
It is always important to work with an experienced mortgage professional who specializes in working with divorcing clients. A Certified Divorce Lending Professional (CDLP®) can help answer questions and provide excellent advice. Please don't hesitate to reach out to me directly if I can provide additional information.
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