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January 1998
| Mary and Bill recently divorced. Their divorce decree stated
that Bill would pay the balances 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 them to the divorce decree, insisting that she was not
responsible for the accounts. The creditors correctly stated that
they were not parties to the 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 credit.
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. You can
permit authorized persons to use the account with either. When you apply
for credit—whether a charge card or a mortgage loan—you'll be asked to
select one type.
Individual or Joint
Account
Individual Account: Your income, assets, and credit history are
considered by the creditor. Whether you are married or single, you alone
are responsible for paying off the debt. The account will appear on your
credit report, and may appear on 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 be responsible for debts incurred
during the marriage, and the individual debts of one spouse may appear on
the credit report of the other.
Advantages/Disadvantages: If you're not employed outside 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. But
if you open an account in your name and are responsible, no one can
negatively affect your credit record.
Joint Account: Your income, financial assets, and credit
history—and your spouse's—are considerations for a joint account. No
matter who handles the household bills, you and your spouse are
responsible for seeing that 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: An application combining the
financial resources of two people may present a stronger case to a
creditor who is granting a loan or credit card. But because two people
applied together for the credit, each 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 histories 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 to a credit bureau must report it in your spouse's name as
well as in your's (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: User accounts often are opened for
convenience. They benefit people who might not qualify for credit on
their own, such as students or homemakers. While these people may use
the account, you—not they—are contractually liable for paying the
debt.
If You Divorce
If
you're considering 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's an outstanding balance on a joint account, you
and your spouse are responsible for it.
If you divorce, you may want to close joint accounts or accounts in
which your former spouse was an authorized user. Or ask the creditor to
convert these accounts to individual accounts.
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 change joint accounts to individual accounts.
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.
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