A significant concern many couples face upon dissolving their marriage is the fate of property that was acquired jointly during the marriage, and the related individual credit consequences. As each spouse is entitled to receive a share of the marital assets upon divorce, they also must share in the marital debts. Depending on the state in which the couple lives, each former spouse is vulnerable, at least to some degree, to the other spouse damaging their credit. However, there are some ways in which individuals can protect their assets and their credit after a divorce.
Joint Accounts, Debts and Divorce
Often, when couples marry, they pool their income and other assets into joint accounts. Similarly, married couples also incur joint debts. Thus, upon divorce, all marital assets and debts must be distributed between them.
In the 41 non-community property states, each former spouse is typically only liable to pay off "joint debts," or those debts which were incurred by both spouses during the marriage. However, in the remaining nine community property states, both spouses may become responsible for both joint and individual debts incurred during the marriage.
Typical joint accounts include:
- Joint bank accounts
- Joint credit card accounts
- Joint equity lines of credit
- Home mortgages
- Car loans
Former spouses can adversely affect each other's credit since they are both partially or fully liable to repay the debts that were incurred during the marriage.
Joint Bank Accounts
Joint bank accounts can become particularly troubling during divorce proceedings since both spouses retain access to the funds. For example, one spouse could completely deplete the funds in the account to the detriment of the other. Three common ways to protect finances in joint accounts include the following actions:
- Mutually divide the account in half and deposit into individual accounts
- "Freeze" the account to disallow monies in or out without mutual consent
- Empty all joint accounts into one account and "freeze" the consolidated account
Joint and Individual Credit Card Accounts
Simply "closing out" a joint credit card account does not automatically terminate the liability of each spouse. This is due to the fact that the balance remains due after cancellation and both spouses' names appear on the credit contract. As such, one spouse can still damage the credit of the other by failing to repay their share of the obligation. Further action must be taken in order to adequately protect an individual's credit upon divorce.
For example, provided they have the ability to do so, one or both former spouses can pay off the outstanding balance of the account. In addition, a creditor may be willing to convert the joint credit account into individual, separate accounts. However, creditors are not required to perform this function.
Joint Equity Lines of Credit
A joint equity line of credit is one in which a lender grants a loan, using marital property, such as a home, for security. If a couple defaults on the loan, the bank or financial institution can force a couple to sell their home in order to recover its money.
Unfortunately, at the onset of a divorce, one spouse may abuse the equity credit line. Since the account was entered into jointly, both spouses are responsible for the debt. In order to protect individual credit, one or both former spouse(s) should notify their creditor of their pending divorce and request that equity lines of credit be frozen so that both spouses must approve of any account activity.
Home Mortgages and Car Loans
It is crucial for divorcing spouses not to leave the mortgage or car loans in both of their names. Even where a divorce decree specifies that one former spouse is solely responsible for the mortgage or car loan, the other spouse's credit may be impacted should they fail to make payments. In both instances of home mortgages and car loans, some precautionary measures can be taken by the divorcing spouses to protect their own credit including:
- Selling the home/car before the divorce
- Refinancing the home/car in one person's name
Divorce Decrees Do Not Necessarily Protect Credit After Divorce
Since liability for the repayment of joint (and sometimes individual) debt falls on both spouses, one former spouse can adversely affect the credit of another after divorce. Although debt payoff may be specifically incorporated into the divorce settlement, that may not be sufficient to protect one's credit. Even though a divorce decree is issued by the court, the court does not have the authority to overturn contracts between debtors and creditors.
The contract, and thus the "debt" remains intact until the contract ends or the debt is paid in full. Accordingly, divorce decrees cannot relieve one spouse from their financial obligations associated with the joint debts they incurred during their marriage. Further, divorce decrees cannot protect one former spouse's credit if their ex-spouse fails to pay an originally joint debt that was solely assigned to them by the court.
© 2010 NextClient.com, Inc. All rights reserved. |
