Divorce is complicated. Credit card debt is complicated. Put them together and… it’s complicated.
A divorce court may divide debts in different ways. Different states have different laws and courts often have extensive room for interpretation. Even after the court has had its say, though, you still have to deal with your creditors. In their eyes, the person whose name is on the account is liable for the debt, no matter what the court says. Joint accounts split the liability but can also create issues if one spouse declares bankruptcy or deliberately runs up debt.
The best way to avoid these complications is to deal with debt honestly and organize debts as effectively as possible before going to court. If that’s not possible the process of resolution can be extended and difficult. Knowing what to expect can make the process easier.
What Kind of Credit Card Debt Do You Have?
How your credit card debt comes out of divorce will be partially shaped by how your debt is organized going into a divorce.
There may be several types of credit card debt to deal with:
- Individual accounts. These accounts are in the name of only one of the two spouses. They can only be used by one spouse and their payment record only appears on the cardholder’s credit report.
- Individual accounts with the other spouse added as an authorized user are also in the name of one spouse known as the “primary cardholder”. The other spouse, as an authorized user, is allowed to make changes on the account but cannot make changes to the account terms. The cardholder is responsible for payment. The account’s history will be reported to the card holder’s credit record and may be reported to the authorized user’s record.
- Joint accounts are opened by two individuals, who share all rights and responsibilities. Either party can make changes on the account or request changes in the terms. All activity on the account is reported to the credit reports of both parties and affects them equally.
Each of these presents different problems and potential solutions.
How Divorce Courts Handle Credit Card Debt
State laws manage divisions of assets and liabilities in a divorce differently, but the states fall into two general categories:
- Common law states generally hold individuals responsible for individual debts and treat joint accounts as joint responsibility. Most states are common law states.
- Community property states treat all debt acquired after the marriage as joint responsibilities, regardless of whose name it is in. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states.
These laws set out general guidelines, but divorce courts have wide latitude in assigning responsibility for debts. If an individual account was used to buy property for joint use a judge may decide that it’s a joint responsibility. If one partner made purchases for individual use on a joint account, it may be ruled an individual responsibility.
Judges may consider the length of separation, evidence of financial irresponsibility, agreements between the parties, income differences between the parties and other factors in assigning responsibility for debts.
How Credit Card Issuers Handle Divorce
You might think that once a judge rules on responsibility for a debt, the matter is decided. It’s not always that simple. Your credit card debt was incurred under a contract between you and the credit card issuer. A divorce court ruling does not eliminate or supersede that contract.
If a judge orders your ex-spouse to pay a credit card debt and your ex-spouse doesn’t pay, the late payments will still show up on your credit report, and the card issuer will still come after you. You can sue your ex-spouse to try to force payment, but as far as the card issuer is concerned, your name is on the contract and you are liable. Even if a court forces your ex-spouse to make the payment or compensate you for damages, the damage to your credit will be there for seven years.
A card issuer may not agree to remove one party’s name from a joint account while there is still a balance on the account. As long as your name is on the account, you will share the consequences of late or missed payments, even if a judge has assigned responsibility to your ex.
The Risks of Joint Accounts for Divorced Couples
Leaving a joint account open after filing for divorce has significant hazards. There are several things that can go wrong.
- Vindictive spending. One spouse can deliberately run up a high balance on a joint card. If one party to the divorce already has bad credit, they may decide to ruin the other party’s credit as well.
- An ex-spouse can transfer balances from their own card to a joint card. That effectively turns an individual responsibility into a joint responsibility
- One party may file for bankruptcy without notifying the other. A bankruptcy discharge eliminates the filer’s responsibility for a debt, but it doesn’t eliminate the debt. If your ex-spouse is bankrupt and you’re not, the entire debt lands on your plate.
- A card issuer may not agree to remove one party’s name from a joint account while there is still a balance on the account. As long as your name is on the account, you will share the consequences of late or missed payments, even if a judge has assigned responsibility to your ex.
Consider the possible outcomes before deciding to keep a joint account open after a divorce is initiated.
How to Protect Your Credit in a Divorce
Many of the pitfalls of dividing credit card debt in a divorce can be avoided if the parties to the divorce are willing to cooperate. Here’s what you can do:
- Get individual credit cards if you don’t already have them. Do this before closing any accounts, as closing accounts could lower your credit and make it harder to get new cards.
- Pay off and close all joint accounts before initiating the divorce. Transfer balances to your new cards if necessary.
- If one spouse is an authorized user on another’s personal card, remove their name from the account.
- Come to a clear, written agreement on who is responsible for what debt. Write it down.
- Keep complete documentation to file with the court.
- Seek help from a mediator or financial planner rather than from an attorney.
- If you must file for bankruptcy, advise your ex-spouse before doing it if there is any jointly held debt. It may be advantageous to file at the same time, especially if you will file while you’re still married.
If your spouse will not cooperate, things may become more complicated than they need to be. You’ll need to document everything and follow your attorney’s advice.
Divorce is never simple or easy, and the division of liabilities can be just as difficult and contentious as the division of assets.
Always remember that the rulings of a divorce court do not bind a credit card issuer. No matter who the court has ordered to pay the debt, late or missed payments will be charged to the person whose name is on the contract.
Cooperation can make it easier to prepare for divorce and make sure debts are distributed in an orderly and equitable fashion. If possible, work together. Both of you will save money and avoid unnecessary damage to your credit.