Monday, August 29, 2011

Debt and Marriage: When Do I Owe My Ex-Spouse's Debts?

Day 150: And that's that.Image via WikipediaWhile researching this article, I Googled the words "debt" and "divorce", I got over 14 million results. In our society, debt and divorce go hand in hand. With money problems the leading cause of divorce in our country I can see why. Even with many intact marriages money is a big point of contention. The bills are continually rising, it costs a lot to raise children and many other factors contribute to the problem. Sadly the strain, of money problems, can be devastating and many marriages end up in divorce.

In a divorce, the marriage you entered into with such high hopes, can be ended with the signature of a judge. The only problem is that debts are not eliminated so easily. If your in the pre-stages of divorce you may want to learn how the debts of the marriage are going to be looked at by the creditors. You may agree with your spouse or the judge may decide for you who is to pay the debts but your debtors don't look at it the same way you are.

With all forms of debt entered into you will find two ways the responsible parties are listed:

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.

Pro's and Con's:
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).

Pro's and Con's:
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.

Authorized 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.

Pro's and Con's:
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.

Action Plan:

  • If you're considering divorce or separation, 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.

Failure to do this usually leads to one spouse paying for a while but later defaulting because of lack of income or out of spite. This results in the other spouse having a ding on their personal credit report or eventually being sued by the creditor for not paying.

In a joint mortgage, the only way to get your name off the document is to have the home refinanced. Just having a judges decree for one spouse to pay the debt is not recognized by the creditor. Divorce does a good job of separating you legally from your spouse but does a bad job divorcing you from your spouses debts. It's going to be your job to divorce yourself financially from your spouse.

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