Divorce can be stressful and complicated. When you add credit card debt to the equation divorce gets way more complicated.
Couples considering divorce or in the process of a divorce must carefully prepare for issues involving credit card debt. If you do not understand the types of credit accounts opened during the marriage you may end up with bad credit after the divorce.
Here are a few tips on how to avoid bad credit after divorce and steer clear of the pitfalls divorcing couples often face.
Determine the Type of Account
Determine whether your credit card debt is individual or joint. It is possible to open credit accounts, while married, and that account be considered an individual account. But there are exceptions if you live in a community property state like California.
Living in a community property state may make you and your spouse responsible for debts incurred during the marriage; and, the individual debts of one spouse may appear on the credit report of the other.
Determine if you are an authorized user. Spouses that are authorized users are typically not financially held responsible for credit card debt. Although the account history may appear on the credit report of the authorized user which includes on-time or late payments, the authorized user is usually safe from being pursued for incurred debt.
Debt incurred during a marriage is generally the joint responsibility of both parties, as long as both are co-signers on the credit card accounts. Joint or co-signed accounts means your income, financial assets, and credit history along with your spouse's were considered for a joint account. Both parties are responsible for payment of the debt. The creditor will report the account history to the credit bureaus in both the spouses’ names.
If possible, pay off joint credit cards before the divorce. If not, divide up the debt and transfer it to credit cards in each partner's name. Request the creditor to convert joint accounts to individual accounts.
Dividing the debt can get a little tricky but it is worth the effort. Even though the courts may assign separate debt obligations to each spouse, any account applied together as joint means each spouse is responsible for the debt despite a divorce decree.
Credit card companies are not obligated to abide by divorce decrees. They can pursue you for jointly incurred debt if your former spouse fails to pay. Your goal is to remove your liability from your spouse’s debts.
Cancel Joint Accounts
Any accounts not divided between you and your spouse should be canceled. Even if they are unpaid, you should cancel the account which will prevent either spouse from running up further debt. Canceling joint accounts is a sure way to avoid bad credit after divorce. Former spouses who run up bills and don't pay them can hurt their ex-spouse's credit histories on jointly-held accounts.
By law, a credit card company does not have to change joint accounts to individual accounts. They can require you to reapply for credit on an individual basis and then, based on your new application, extend or deny you credit.
Failing to have a plan on how to avoid bad credit after divorce can greatly impact your standard of living and your future credit prospects. For example, if you do not cancel joint credit card accounts your ex-spouse can stop making timely payments on accounts or stop making payments at all.
If this were to occur, creditors would have every right to go after you for payment of the debt. This could result in a charge-off and a debt collector pursuing you; not to mention, a bad credit score.
But it does not stop there; let’s say your ex-spouse files for bankruptcy on that joint account. You now have the responsibility of dealing with a bankruptcy. Even though provisions can be made in the marriage settlement agreement which holds your spouse responsible; enforcing that agreement means going back and forth to court.
Avoid unnecessary surprises and problems by canceling joint accounts; and, if possible, paying them off before you divorce. Save yourself time and money by working out credit card debt before you divorce — it will help you avoid bad credit after divorce.