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Credit Card Accounts: When Divorce Happens
by: Jeffrey Broobin

A couple recently divorced. Their divorce decree stated that the husband would pay the balances on their three joint credit card accounts. Months later, after he neglected to pay off these accounts, all three creditors contacted the wife 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 the wife was still legally responsible for paying off the couple's joint accounts. She later found out that the late payments appeared on her credit report.

You may want to look closely at issues involving credit if you've recently been through a divorce -- or are contemplating one. Understanding the different kinds of credit accounts opened during a marriage may help show you 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 either an individual or a joint account.

Individual Account

The creditor considers your income, assets, and credit history. 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. If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin) 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

The income, financial assets, and credit history of you and your spouse 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 rule continues to rule your credit score, 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, it will be reported in both of your names (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 yourself are contractually liable for paying the debt. If you are thinking about divorce, examine the status of your credit accounts, because if you maintain joint accounts during this time, it's important to make regular payments so your credit record won't suffer. Remember that if there's an outstanding balance on a joint account, you and your spouse are responsible for it. Therefore, if divorce, you may want to close joint accounts or accounts in which your former spouse was an authorized user.

You could also 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 also is not required to change joint accounts to individual accounts and could 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.

Jeffrey Broobin is a free-lance writer on family and finance issues; his main goal is to help people during their complicated period of life.




 



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