Credit and Divorce

A divorce decree will not relieve either party of joint financial responsibilities. The purpose of divorce is to go your own separate way both emotionally and financially. The handling by one party of once joint accounts can be harmful. The best resolution is to get them paid and closed. Don’t trust that the other party will pay their part. Don’t believe that just because your split is amicable that problems can’t occur. Stay on top of the joint debt, otherwise it may come back to haunt you.

How to Handle Joint Accounts
Federal Trade Commission Consumer Information on Divorce

How to Handle Joint Accounts

The home/mortgage should be the number one priority. Do not, I repeat do NOT walk away from a divorce without your name being removed from the deed.

1. Sell the home. Any monies left over could pay other joint debt such as credit cards or medical bills. It can be unpredictable but selling it before the divorce becomes final would be your best option. Headaches may arise if the house does not sell and your spouse is opposed to moving and/or selling. Remember that you remain responsible for the payment
2. Refinance to one name. You can call a mortgage broker who will help with the paperwork.
3. If selling or refinancing isn't an option. This is the worst possible option, however in today’s economy this may be a reality. You may qualify for a “short sale”. Contact a realtor that specializes in short sales. I recommend shortsaledenver.com. I know the owners personally and they help people in all areas. There are many realtors out there claiming to be short sale specialist. If you encounter one you sale could turn into a nightmare with you having a foreclosure on your record. If all else fails and none of these options work, you best bet is to the following:
   • Keep your name on the title. If you remove your name (using a quit claim deed), you are removing ownership but not loan responsibility which means that you will not be able to split the equity in the home at the present time.
   • Place a limit on how long your ex can stay in the house before it will be sold or refinanced.
   • Notify the mortgage company of your divorce and ask all correspondence be sent to both parties.

Car/Car Loans should be handle in the same manner as a home.

1. Sell the car. Try to sell before the divorce occurs.
2. Have one spouse refinance the car in his/her own name. If one spouse is to keep the car after the divorce, before you get divorced, insist that your soon-to-be-ex obtain new financing in their own name.
3. If selling or refinancing isn't an option. This is the worst possible option. Perhaps the car note is upside down or it will cause a hardship to your ex and/or your children, you can try to protect yourself in the following manner: hardship to your ex (and/or your kids), and he is unable to refinance car on his own, here are some things you can do to protect yourself:
   • Don't take your name off the title. If you take your name off of the title, you are removing ownership but not loan responsibility, a precarious situation to be in.
   • Call the insurance company advising of the divorce. Provide your mailing information and request all correspondence be sent to both addresses.
   • Notify the car finance company of your change of address and statements sent to your new address as well.

Joint Credit Card Debt. Closing joint credit card accounts is not the end of the headache. The remaining balances still need to be paid off. What’s worse is it's easy to reopen accounts if the accounts are being paid on time - credit card companies encourage this. If you cannot pay off and close the balances immediately (it may be difficult to legally divide up debts that have not been paid off, check with your lawyer), here are some solutions for getting rid of it, listed from best option to worst:

1. The easies remedy to this problem is the money left from the sale of a home or joint asset. Pay off the debt, close the account.
2. Apply for separate lines of credit in an agreed-upon amount and transferred the joint debt to these new accounts.
3. If your spouse can't qualify for credit on his own insist they have a co-signer help them.

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Federal Trade Commission Consumer Information on Divorce

The following is straight from the Federal Trade Commission website at :

www.ftc.gov/bcp/edu/pubs/consumer/credit/cre08.shtm

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.

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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.

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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 your's (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.

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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 or to get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

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