Who Pays Credit Card Debt in a Divorce?
If you’re contemplating a divorce, you may be wondering: how will credit card debt be divided? There are several factors that can influence who pays.
- Whose name is it in?
- What state do you live in?
- When was the credit card debt acquired? Before, during or after the marriage?
- What else are you getting (or not getting), asset-wise, in your divorce settlement?
Who is Responsible for Credit Card Debt?
The responsibility for joint accounts can vary, but most states consider marital debt to be any debt accumulated during the partnership, regardless of whose name appears on the account. In most cases, both parties will be partially responsible for the debt, regardless of who was making the payment.
If there is only one authorized user on the account, that party likely will be given full responsibility for payment.
If you’re faced with a divorce, how can you best protect your financial interests? It’s important to be fair, but it’s vital to enter the process with eyes wide open.
“Ultimately, divorce forces people to become much more aware of their finances, budgets and money choices,’’ said attorney Regina A. DeMeo, an alumna of George Washington University Law School who works with custody and divorce issues through mediation, litigation or advocacy. “It’s a tough lesson to live through, but it does provide you with great life skills.’’
Generally, courts divide the couple’s debts and assets, while deciding who is responsible for paying specific bills. Some states consider the assets and debts each spouse brought into the marriage. Other states consider everything to be owned equally. If there was a prenuptial agreement, that can influence any legal decisions.
“You already know the emotions are running high on both sides because you’re breaking up a family,’’ said Chris Scott, the founder of Chicago’s Opulent Credit Builders, a Minority Business Enterprise credit-repair company. “Everybody wants to talk, but nobody wants to listen. Both parties have to be open and just go over it like itemized line items, like you do on taxes.’’
Protecting your own interests are paramount, according to attorney Janice S. Lintz, who also is a consumer education/travel writer.
“You are responsible for any debt with your name on it,’’ Lintz said. “Any liability where someone can take out additional credit should be closed. Otherwise, you could find yourself responsible for half of the new debt.
“Be sure to have explicit orders defining who is responsible for what. Whatever a judge orders will not impact your prior contractual relationships with banks or loans. You are still on the hook and liable.’’
Debt Management Programs and Divorce
If a couple is drowning in credit card debt and enters a joint debt management program while still married, then gets divorced before the joint DMP has run its course, there could be problems. If the two sides agree to sell possessions, the money received may be enough to pay off the debt management plan early. If not, the two sides could quit the debt management program and whatever debts are still unpaid would be divided along with the other debts.
To protect your credit after divorce, you must make sure the debts in your name are repaid. Another alternative is to have your name removed, although that’s a difficult proposition for many lenders to accept. After all, the loan was approved by considering the credit histories and incomes of both spouses, so the lender could refuse to make any concessions.
Besides getting a better understanding of who pays what when it comes to credit card debt in a divorce, you’ll also want to know how to protect yourself and your credit score from the fall-out.
Don’t Run Up Credit Card Debt Right Before a Divorce
If you take nothing else away from this subject, remember the following statement: Any crazy, superfluous spending must stop — immediately! — to prevent a bad situation from becoming even worse.
“There are some things people just don’t seem to understand,’’ Scott said. “Let’s say the husband has the wife as an authorized user on the credit card. She can run up the bill and have everything fall on him, right? She doesn’t care, so she’s spending money, right?
“Well, guess what? She’s attached to the credit card, too. It’s being reported to the credit bureau and her credit score could take a big hit. The best thing to do is call the credit card companies immediately and say, ‘Please drop Sally Sue off the card. We are no longer together.’ That will kill everything right there.’’
Close All Joint Accounts When You Separate
Ideally, you should close all joint credit card accounts so that no one is accumulating further debt in the other party’s name. But most credit card companies won’t close the account until the full balance has been paid. So sometimes, people are faced with paying just the monthly minimum balance until the courts decide how that debt should be allocated.
How to Work with an Ex-Spouse on Joint Debt
Is this easy?
“It’s always best to be clear-minded and not have anybody in your ear for this to work our properly,’’ Scott said. “It’s best to keep the circle very small. Me, you and God … if you can limit it to that, all the better.
“That being said, it’s rare to find a couple with clean credit or a couple that says, ‘OK, we’re here to work on this together.’ Usually, it’s I kick your dog, you kick my cat, and that’s it.’’
If there is a couple motivated by the best intentions, though, there’s a clear path.
“Both parties need to sit down together and go over each one’s credit report,’’ Scott said. “Once you go over the credit report, you see who owes what. This is your bill. This is my bill. This is what we accumulated together.
“It’s important to really sit down with a clear head and plan it out, so there’s no bickering back and forth. It’s better to hash it out yourself instead of having a lawyer or judge get in the middle and decide for you. Because in a situation like that, the only person who wins is the lawyer. You’re paying by the hour. No matter what, that lawyer is going to keep getting their money.’’
DeMeo suggested a common-sense approach to personal finance.
“Develop a realistic budget,’’ DeMeo said. “Understand what are truly necessary expenses, such as housing, food, medical care and transportation, and what are discretionary expenses, such as travel and entertainment.
“Do you have sufficient income to meet your expenses? If not, how will you make up the difference? Either you need to increase your income, decrease your expenses or you temporarily need to get a loan or tap into savings.’’
It’s also important to know that a divorce agreement does not supersede the terms of a loan agreement.
Even if one spouse is made responsible for paying a debt following the divorce — and even if it’s a joint debt, such as a car loan — they could ignore those payments. If the other spouse is part of the loan — as a borrower or co-signer — they are on the hook for any default, late fees or collection costs.
If your name is on the loan, you are responsible — period.
Lenders likely aren’t aware there was a divorce and won’t by sympathetic to anything other than repayment of the loan. It’s always best to include an indemnity clause into your divorce agreement. You could petition the court and demand that terms of the divorce agreement be followed, perhaps causing the spouse to face fines or even jail time.
To protect your credit, though, you must make sure the loan is repaid. Another alternative is to have your name removed from the loan, although that’s a difficult proposition for many lenders to accept. After all, the loan was approved by considering the credit histories and incomes of both spouses, so the lender won’t want to make any concessions.
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