Joe and Paula were divorced recently. The divorce decree specified that Joe will pay the balances of the tow jointly held credit card accounts. Joe failed to pay the accounts and the creditors contacted Paula for payment, who showed the creditors the divorce decree. The creditors in turn informed her that they are not parties to the divorce proceeding and so she was legally liable for the debts. Paula was shocked to discover that creditors were right when they informed her that she was still legally liable for the debts despite the decree and that the non-payment will appear on her credit report.
Credit issues are very important in a divorce proceeding. You must understand the legal implications of the different credit accounts opened during the marriage. There are two kinds of credit accounts – joint and individual. At the time of applying for credit, you must choose between the two.
Joint Account: At the time of opening a joint account, the lender will consider the credit history, financial assets and income of you and your spouse. Both of you will be responsible for the debt. If the account was opened after June 1, 1977, a default in a joint account will be reflected on the credit reports of both spouses.
Advantages/Disadvantages: When you apply for a joint account, the creditor will consider the credit reports and finances of you as well as your spouse. This will help in presenting a stronger financial picture but both spouses will be responsible for the debt even if the divorce decree assigns the debt to one spouse or splits the debt equally or in part. If the spouse who was to pay the debt under the decree fails to do so, it can affect the credit of the other spouse.
Individual Account: The creditor will only consider the credit history, assets and income of the applicant spouse. The applicant spouse alone is responsible for the repayment irrespective of whether he or she is married or single. The defaults will appear on your credit reports as well as the credit report of any person named as the authorized user. In community states – Alaska, California, Arizona, Idaho, Nevada, Louisiana, Texas, New Mexico, Wisconsin and Washington – a spouse’s individual debts will appear on the other’s credit report and both spouses may be liable for the debts incurred during the marriage.
Advantages/Disadvantages: Applying for a joint account is beneficial for those who work from home or work part time or whose income is low as combining the income of the spouse can help them qualify for the credit. You alone will be responsible for an individual account and the activities of your spouse will not affect your credit.
If you have an individual account, you can authorize someone else to use it by naming that person as the authorized user. If your spouse is the authorized user of your individual account, and the account was opened on June 1, 1977 or later, the creditor must report you and your spouse to debt credit bureaus in case of non-payment. The creditor can also report the authorized user to the credit bureaus for non-payment.
Individual accounts offer the convenience of naming an authorized user. By naming someone as an authorized user, you can help someone who would otherwise not qualify for credit on their own. While the authorized user can use the credit, you will be liable for the payments.
If you are planning a divorce, check the status of your credit accounts. Make regular payments of the joint accounts to prevent your credit being damaged. Both spouses will be liable for the outstanding balance. You should close all joint accounts or accounts with your spouse listed as the authorized user. Alternatively, you can convert these accounts to individual accounts.
Legally, the creditor does not have the legal right to close down a joint account because of a divorce or any other dispute between the spouses but can do so if either spouse makes a request. However if one spouse requests that a joint account be converted to an individual account, the creditor can refuse to do so and can ask the spouse to apply on individual basis which will be considered as an independent application. A home equity loan or mortgage lender will generally require refinancing to remove the other spouse from being liable for the debt.