Credit and Divorce
Mary and Bill recently divorced. Their divorce decree stated that
Bill would pay the balances on their three joint credit card accounts.
Months later, after Bill neglected to pay off these accounts, all
three creditors contacted Mary for payment. She referred them to the
divorce decree, insisting that she was not responsible for the accounts.
The creditors correctly stated that they were not 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 report.
If you've recently been through a divorce-or are contemplating one-you
may want to look closely at issues involving credit. Understanding the
different kinds of credit accounts opened during a marriage may help
illuminate the potential benefits-and pitfalls-of each.
There are two types of credit accounts: individual and joint. You can
permit authorized persons to use the account with either. When you apply
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 married or single, you
alone are responsible for paying off the debt. The account will appear
on your credit report, and may appear on the credit report of any "authorized"
user. However, if you live in a community property state (Arizona, California,
Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin),
you and your spouse may be responsible for debts incurred during the
marriage, and the individual debts of one spouse may appear on the credit
report of the other.
Advantages/Disadvantages: If you're not employed outside the
home, work part-time, or have a low-paying job, it may be difficult
to demonstrate a strong financial picture without your spouse's income.
But if you open an account in your name and are responsible, no one
can negatively affect your credit record.
Joint Account: Your income, financial assets, and credit history-and
your spouse's-are considerations for a joint account. No matter who
handles the household bills, you and your spouse are responsible for
seeing that debts are paid. 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. But because two people applied together
for the credit, each is responsible for the debt. This is 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 person
to use it. If you name your spouse as the authorized user, a creditor
who reports the credit history to a credit bureau must report it in
your spouse's name as well as in yours (if the account was opened after
June 1, 1977). A creditor also may report the credit history in the
name of any other authorized user.
Advantages/Disadvantages: User accounts often are opened for
convenience. They benefit people who might not qualify for credit on
their own, such as students or homemakers. While these people may use
the account, you-not they-are contractually liable for paying the debt.
If You Divorce
If you're considering divorce or separation, pay special attention to
the status of your credit accounts. If you maintain joint accounts during
this time, it's important to make regular payments so your credit record
won't suffer. As long as there's an outstanding balance on a joint account,
you and your spouse are responsible for it.
If you divorce, you may want 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 because of a change
in marital status, but can do so at the request of either spouse. A
creditor, however, does not have to change joint accounts to individual
accounts. The creditor can require you to reapply for credit on an individual
basis and then, based on your new application, extend or deny you credit.
In the case of a mortgage or home equity loan, a lender is likely to
require refinancing to remove a spouse from the obligation.
For More Information
The FTC works for the consumer to prevent fraudulent, deceptive and
unfair business practices in the marketplace and to provide information
to help consumers spot, stop and avoid them. To file a complaint, call
toll-free, 1-877-FTC-HELP (1-877-382-4357.
4470 W. Sunset Blvd., Suite 216, Los Angeles, CA 90027
