Credit and Divorce, A Volatile CombinationB. Glenn Bartholomewjoint accounts, divorce, credit accounts, individual accounts, credit reporting
Mary and Bill recently divorced. Their divorce decree stated
that Bill would pay the balance 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 to the divorce decree, insisting that she was not
responsible for the accounts. The creditors correctly stated that
they were not parties to the divorce 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 your credit.
Understanding the different kinds of credit accounts that you
opened during your marriage may help illuminate the potential
benefits or 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 you apply for a charge card or a
mortgage loan, you will be asked to select one or the other.
Individual Accounts
The creditor considers your income, assets and credit history.
Whether you are married or single, you alone are responsible for
paying off the debt. The account will appear on your credit report
and perhaps 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 appear on each other's credit report.
Advantages/disadvantages: If you are not employed outside of 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. If you open an account in your name and are responsible, no
one can negatively affect your credit.
Joint Accounts
You and your spouse's income, financial assets and credit history
are considerations for a joint account. No matter who handles the
household bills, you and your spouse are responsible for seeing
that the debts are paid. A creditor who reports the credit history
of a joint account to the 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 the loan or credit card. But because the two people
applied together for the credit, each person 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 history 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 of that account to a credit
bureau must report it in your spouse's name, as well as yours, if
the account was opened after June 1, 1977. A creditor may also
report the credit history in the name of any other authorized
user.
Advantages/disadvantages: User accounts often are opened for
connivance. They benefit people who might not qualify for credit on
their own, such as students or homemakers. While these people may
use the account, they are not contractually liable for paying the
debt.
If You Divorce
If you are considering a 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 is an
outstanding balance on a joint account, you and your spouse are
responsible for it.
If you divorce, you may want to close the joint accounts or the
accounts on which your former spouse was an authorized user. Or ask
the creditor to change the account from a joint account to an
individual account.
By law, a creditor cannot close a joint account because of a
change in marital status, but they can close the account at the
request of either spouse. A creditor does not have to change a
joint account to an individual account. The creditor can require
that you 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 the spouse from the loan.
B. Glenn Bartholomew, CCMB is President-Elect for the Colorado Association of Mortgage
Brokers. He may be reached at (303) 940-5787 or e-mail
[email protected].
