Who Is Responsible and How It Will Impact Your Credit
Of the many financial challenges that must be sorted out as part of a divorce, credit card debt may rank #1 in the least-desirable category. You may be wondering, “Who is responsible for our credit card debt?” Like most other aspects of divorce, the answer can be complicated.
How is debt handled in a divorce?
States typically handle debt from a divorce in one of two ways:
- “Common law” states hold the spouse who incurred the debt responsible for its repayment. This means you would only be responsible for debt issued that is issued in your name, jointly to you and your spouse, or to your spouse with you as a co-signer.
- “Community property” states hold both spouses responsible for any credit card debt incurred during the marriage, even if the debt is only in one spouse’s name.
However, based on your particular situation, a judge may decide to assign debt differently. For example, if your spouse is responsible for paying off your shared car loan, you may find yourself responsible for his or her credit card debt. It’s important to note, however, that credit card companies will hold you accountable to your original credit agreement, regardless of a judge’s orders. That means if a judge assigns the debt to your spouse and he/she refuses to pay, the credit card company may still come after you. Also, if you and your soon-to-be-ex-spouse share a joint credit card, you can’t simply have your name taken off the account. Instead, you’ll need to completely pay off the balance in order to close the account.
How will divorce impact your credit?
Marital status is not included in your credit history, so getting divorced doesn’t directly impact your credit score. However, divorce can negatively impact your credit if you fall behind on payments or your ex-spouse does not follow through on handling the joint debt assigned to him/her as part of the settlement. Divorce doesn’t automatically divide the credit you and your ex-spouse took on together, even if your divorce decree indicates you are no longer responsible for making payments. This means if your ex fails to make payments on joint accounts, your credit can still be negatively impacted.
Tips for protecting your credit
Be proactive in protecting your credit with the following tips:
- Make a plan – If things are amicable between you and your spouse, start by taking inventory of all joint credit cards and other loans, and decide who will be responsible for paying each one.
- Open your own checking accounts – If you don’t already have one, establish a checking account in your own name. If you are employed, have your paychecks deposited directly into the new account. This can help ensure you have funds available to cover your debt payments.
- Begin establishing credit in your own name – It’s wise to open a new credit card in only your name as soon as possible during the divorce process. Be sure to apply for the card before closing your existing accounts, as closing accounts can negatively impact your credit score.
- Close joint credit accounts – Close as many joint credit cards as possible to help ensure your spouse doesn’t take out additional debt for which you may later be held responsible. If your joint credit card has a balance, and thus is unable to be closed, instead consider freezing the card to stop future charges.
At Creative Planning, we understand how challenging all aspects of a divorce can be. That is why we focus on providing you with a clear path forward by helping you to determine your financial need, gain an understanding of your options and make decisions that are in the best interest of you and your family. For help managing your credit card debt in a divorce, or with any other financial matter, schedule a call with a member of our team. This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.