Credit and Divorce

Mary and Bill recently divorced. Their divorce decree stated that Bill would pay the balances. Months later, after Bill neglected to pay off the accounts, all three creditors contacted Mary for payment. She referred them into the divorce decree. The creditors correctly stated they weren’t parties to the decree and that Mary was still legally responsible for paying off the couple’s joint accounts. Mary later found out that the late payments appeared on her credit record.

If you have been through a divorce – or are contemplating one – you may choose to look closely at issues involving credit. Understanding the different sorts of credit accounts opened during a marriage may help illuminate the potential benefits – and pitfalls – of each.

There are two different types of credit accounts: individual and joint. You can permit authorized persons to use the account with . When applying for credit – whether a charge card or a mortgage loan – you’ll be asked to select one type.

Individual or Joint Account

Individual Account: Your income, assets, and credit history are considered by the creditor. Whether you are single or married, you’re responsible for paying the debt. The accounts will appear on your credit file, and may show up on the credit report of any”authorized” user. However, if you reside in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), you and your spouse could be liable for debts incurred during the marriage, and the individual debts of one spouse may appear on the credit report of the other.

Advantages/Disadvantages: In case you aren’t employed outside the house, function or possess a low-paying job, it may be tricky to demonstrate a strong financial picture without your spouse’s income. But if you are responsible and open an account in your name, nobody can negatively impact your credit record.

Joint Account: Your income, financial assets, and credit history – and your spouse’s – are considerations for a joint account. Are responsible for seeing that debts are paidoff. 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).

Advantages/Disadvantages: 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. However, because two people applied together for the credit, each is responsible for your debt. This can be 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.

Account “Users”

If you open an individual account, you may authorize another individual. If you name your spouse as the authorized user, a creditor who reports the credit history to a credit bureau must report it on your partner’s name in addition to in your’s (if the account was opened after June 1, 1977). A creditor also may report the credit history in the name of any authorized user.

Advantages/Disadvantages: User accounts often are opened for convenience. They benefit people who might not qualify for credit by themselves, like homemakers or students. While these individuals can use the account, you – not they – are contractually liable for paying the debt.

Should You Divorce

If you are thinking about divorce or separation, pay special attention. If you maintain joint accounts during that time, it’s important to make regular payments so your credit record will not suffer. Your spouse and you are liable to it as long as there’s an outstanding balance on a joint account.

Should you divorce, you may choose to close joint accounts or accounts in which your former spouse was an authorized user. Or ask the creditor to convert these accounts to individual accounts.

By law, a creditor cannot close a joint account due to a change in marital status, but can do this at the request of either spouse. A creditor, however, does not need to change joint accounts to individual accounts. The lender may require you to reapply for credit on an individual basis and then, based on your new application, extend or deny you creditscore. In the instance of a mortgage or home equity loan, a lender is likely to require refinancing to remove a spouse from the obligation.