When divorce is present, it is crucial to understand what happens to the liability for credit card debt and other personal lines of credit in divorcing situations. In a divorce, the extent of a party's liability for credit card debt depends 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 in the divorce.
- Who the debt is assigned to in the divorce.
Credit Card Liability in 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 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, you are not liable for any credit card debt owed solely by your spouse in most cases.
Special Rules for Community Property States
When it comes to property distribution and debt allocation, certain states follow community property laws rather than the 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. Therefore, both spouses are held equally liable for community debts even if only one spouse incurred the debt.
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 their 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. 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 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.
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 or not paid.
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.
Closing of Joint Credit Accounts
The obvious decision would be to immediate close any jointly held credit accounts such as credit cards and other personal lines of credit and establish new individual credit lines. However, the closing of these accounts may sometimes require strategic planning.
Credit reporting agencies do not recognize why or by whom a credit line was closed, it only recognizes that there is a new closed account and new accounts opened. The closing and opening of new accounts may have an immediate negative affect on your credit score. Although this effect may be only temporary, if you are in the middle of obtaining new mortgage financing, a drop in your credit score may affect the cost and terms of your mortgage loan, it may affect you insurance premiums when establishing new insurance, and more.
Strategically planning the closing and opening of new credit accounts with your Certified Divorce Lending Professional may have a significant impact on the overall costs and terms associated with your new mortgage loan whether you are refinancing or purchasing a new home.
How are you integrating divorce mortgage planning into your case management?
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.
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.
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