( Excerpt Courtesy - FTC: Public Reference Document )
Quick Look
- If you are divorcing your spouse, pay special
attention to credit accounts held jointly,
including mortgate, home equity loans, and credit
cards.
- In conjunction with a divorce, ask creditors to
close any joint accounts. Try to convert or
reopen these as individual accounts.
- A joint account means both spouses are legally
responsible to the creditor for the account. This
is true even if a divorce decree makes one spouse
responsible to the other for paying off the joint
account (since creditors are not a party to this
agreement).
- On jointly-held accounts, your credit record will
suffer if a former spouse handles it
irresponsibly. This could happen, for example, if
a former spouse makes numerous charges on a
credit card and then refuses to pay.
Mary and Bill were recently divorced. Their
court-approved divorce decree stated that Bill would pay the
balances on their three joint credit card accounts. Some 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 stated, correctly, 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 own credit
report.
If you have recently been through a divorce
-- or are contemplating one -- you may want to look closely at
issues involving credit. As the above example illustrates, you
may discover unanticipated problems.
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.
With either type, you can permit authorized users to use the
account. When you apply for credit -- whether a charge card or a
mortgage loan -- you will be asked to select one kind.
Applying for an Individual or Joint Account
INDIVIDUAL ACCOUNT: When you apply for an individual account,
only your own income, assets, and credit history are considered
by the creditor. Whether married or single, you alone are
responsible for paying off the debt on this account. The account
will appear on your credit report (and may appear on the credit
report of any "authorized" user -- as discussed below).
Please note that this may not be the case if you live in a
community property state. In some community property states, both
spouses 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 spouse. You may want to check your
state laws if you live in one of the following states: Arizona,
California, Idaho, Louisiana, Nevada, New Mexico, Texas,
Washington, and Wisconsin.
Advantages/Disadvantages: For spouses who do not
work for pay outside the home, work part-time, or work in
lower-paying jobs, it may be difficult to demonstrate a strong
financial picture without the income of the other spouse. But, if
you are able to open an account in your own name, nobody else can
adversely affect your credit record.
JOINT ACCOUNT: The income, financial assets, and credit history
of both spouses are taken into consideration for a joint account.
No matter who actually handles the household bills, both spouses
are responsible for seeing that all 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: A joint application
combining the financial resources of two people may present a
stronger case to a creditor for granting a loan or credit card.
But because two people applied together for the credit, each
spouse is legally responsible to the creditor for the entire debt
accumulated. This is true for a joint account even if a divorce
decree assigns separate debt obligations to each spouse. A former
spouse can adversely affect another spouse's credit history on a
jointly-held account, for example, by running up bills and not
paying them.
Allowing "Users" on Your Account
If you open an individual or joint account, you may authorize
another person, often a relative, to use that account. You apply
for credit based on your own financial information and are fully
responsible for paying any debt. If you authorize your spouse to
"use" your individual account, a creditor who reports
the credit history to a credit bureau must report it in the name
of your spouse as well as in your name (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:
These accounts are often opened for convenience. They are helpful
to people who might not qualify for credit on their own, such as
students or homemakers. While these persons may use the account,
they are not contractually liable for paying the debt. If you are
permitting others to use your credit card, know that you alone
are responsible for paying the bills.
What To Do in the Event of Divorce
If you are contemplating divorce or separation, be sure to pay
attention to the status of your credit accounts. If you maintain
joint accounts during that time, it is important to make regular
payments -- so your credit record won't suffer. As long as there
is an outstanding balance on any joint account, both you and your
spouse are liable for it.
You also may want to ask creditors to close any joint accounts or
accounts in which your former spouse was an authorized user. Or,
preferably, ask the creditor to convert these accounts to
individual ones or to the name of the spouse handling that debt.
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 agree to change
joint accounts to individual ones. 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.
