Finances

Consumer Credit and Divorce

If you have recently been through a divorce, or are thinking about one, it is essential that you consider your consumer credit, also known as revolving credit. The following example may illustrate unanticipated problems:

Steve and Mary recently divorced. Their court-approved divorce decree ordered Steve to pay off their joint credit card accounts. After several months, Mary began receiving past due notices and phone calls demanding payment on these accounts. She confidently told the creditors that the divorce decree stated that Steve was responsible for these accounts. The creditors pointed out, correctly, that they were not a party to the divorce decree and that Mary and Steve were jointly responsible for paying off these credit debts. Mary also found out later that the late payments damaged her own credit report, making it difficult to obtain future credit.

Could this problem have been avoided? Yes. It is important to understand the two types of credit accounts: Individual and Joint. When applying for credit, whether credit card or home mortgage, you will be asked to choose one or the other. Each type of accounts has advantages and disadvantages. You can permit authorized users to charge against the account with either of these accounts.

What are the advantages or disadvantages of an Individual or Joint account?

When you apply for an Individual accounts, you are using only your own assets, income and credit history to obtain credit. You alone are responsible for paying the debt on the accounts, regardless if you are married or single. This accounts will appear only on your credit report.

It may be difficult for the individual who does not work outside of the home or who has a part-time or low-paying job to show a strong financial base without the help of the spouse's income. But, if you can open an account in your own name, the effort will be worth while. Nobody can adversely affect your credit record.

A Joint accounts uses the income, assets and credit history of both spouses and therefore both are responsible for the debt and the account payment history is reported on both credit reports. The advantage of a Joint account is that it presents a stronger financial picture to a creditor for granting a loan or a credit card. Because both spouses applied for the credit, each spouse is legally responsible to the creditor for the entire debt accumulated.

A divorce decree may assign separate debt obligations to a spouse but each is still legally responsible for all Joint debt. A former spouse can damage your credit by running up bills and not paying them.

Allowing "Users on your Account"

If you have an Individual or Joint account you may authorize another person, usually a relative, to charge on the account. Why would you do this? Being allowed to charge on an established credit account can be very helpful to the homemaker or student. While these persons may charge against the account, they are not liable for paying the debt. You are allowing use of your credit and you alone are responsible for paying the bills.

In the event of divorce, how do you protect your credit?

When contemplating separation or divorce, pay special attention to your credit accounts. If the accounts are Joint, you and your spouse are jointly responsible for repayment. Any lapse in payment will reflect on your credit.

It is a good idea to contact any joint account or an account on which your spouse was an authorized user. You may want to ask that these accounts be closed or to be converted over to Individual ones in the name of the spouse handling the debt.

By law a creditor cannot close a Joint account because of divorce or separation but can do so at the request of either spouse. A creditor is not obligated to change a Joint account to an Individual one. You may have to reapply for your own Individual account.

Understanding your credit obligations may help you prevent unforeseen problems. Whether your divorce is amiable or not, protecting your credit immediately will help you avoid a possible nightmare in the future.