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Credit and Divorce
Facts for Consumers from the Federal Trade Commission
Credit and Divorce -- April 1994
Produced in cooperation with the American Bar Association, Public
Education Division
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.
For More Information
If you have additional questions about credit, send for copies of
the FTC's free brochures Women and Credit Histories, Fair Credit
Reporting, or Best Sellers, which lists a variety of publications
on credit and other consumer topics. Contact: Public Reference,
Federal Trade Commission, Washington, DC 20580; (202) 326-2222.
11/93
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