Debt and divorce: 5 steps to make a clean credit split
By Dawn Papandrea | Published: July 11, 2014
If you're in the process of getting a divorce, you know that things can get complex when it comes to dividing assets and debts. It's even more complicated if one person doesn't follow debt repayment obligations spelled out in the divorce decree. But there are some things you can do in advance to increase your chances of a smooth split.
First, it's important to know that creditors don't care about your divorce decree. If you and your soon-to-be ex shared joint credit card accounts, for example, you're both legally on the hook for making sure the debts get paid, no matter what you agree on in the decree.
"Your creditors are not parties to your divorce," says Jeffrey Anderson, a Dallas-based divorce lawyer with the firm of McCurley Orsinger McCurley Nelson & Downing, in an email. "You can put in big, bold letters that your ex-spouse is going to pay the credit card debt from the joint card, but if the ex doesn't pay and you send your decree to the credit card company, they'll likely laugh before they throw it in the trash."
To keep things civil and protect your credit score, follow some simple strategies for parting ways with joint debt, for better or worse.
1. Cut off future charges. Figure out which accounts belong to whom. "If you signed the application for a credit card, line of credit or loan, it's in your name," explains Anderson. "That includes those applications signed jointly with your spouse."
Authorized users are a different story -- they usually are not responsible for the account's debt. That being said, as soon the "D" word is suggested, it's best to remove an authorized user from the account so he or she can't access it. There have been plenty of cases where a spiteful spouse runs up a credit card once the relationship goes sour.
For joint accounts -- ones in which you both are equals -- you can't simply remove the other person or close the account if money is still owed. What you can do is request a freeze or a hold be put on the card so no new charges can be made, says Anderson. Once it's paid off, you can close the account.
2. Settle up ASAP. Finding a way to pay off any joint debts prior to or during the divorce can save a lot of headaches, advises Marilyn Timbers, a financial adviser with ING Financial Partners. Get them paid off before you even draw up the divorce papers, if possible.
"If there is any cash or savings available, get rid of that debt before divorce papers are finalized," Timbers writes in an emailed response to questions. "One possible option is to use some of the proceeds from the sale of a family home to pay off debt."
3. Look for and shut down old accounts. The best way to be sure that your good name is protected is to go over your credit report with a fine-toothed comb to make sure that your former partner is not listed on any cards that are also in your name. It could be that you once opened a charge account together and haven't used it in a few years. If the account remains open, the credit is still available and can turn into a potential problem source.
You can put in big, bold letters that your ex-spouse is going to pay the credit card debt from the joint card, but if the ex doesn't pay and you send your decree to the credit card company, they'll likely laugh before they throw it in the trash.
McCurley Orsinger McCurley Nelson & Downing
4. Transfer the balance. If one party agrees to assume a debt, rather than taking their word for it, move the debt over to an individual account using a balance transfer, says K. Mitchell Kelling, attorney and board-certified specialist in family law with Horack Talley in Charlotte, N.C. "I always tell clients if they are concerned about their credit rating (and they should be!), that they should assume the debt obligation for a credit card even if it is a joint obligation," Kelling explains via email.
You can then work with the attorneys to make an agreement that offsets the expense by giving the paying party a greater percentage of any marital assets, she added.
5. Create backups. If your spouse is the one who agrees to take care of the balance but it's not being moved to his or her individual account, try to close any possible loopholes. "I always include a provision in my settlement agreements labeling the debt as a support obligation that is nondischargeable in bankruptcy," writes Jarrod Oxendine, partner at the Atlanta law firm of Clark, Oxendine & Sauls, in an email.
"This prevents a spouse from filing bankruptcy against his/her obligation and discharging that obligation in bankruptcy court, thus leaving the other party as the only remaining party responsible to satisfy the debt in the eyes of the creditor(s)."
As with all aspects of divorce, laws vary by state, so be sure to seek the advice of your attorney and financial adviser. Take it from Timbers: "Debt adds complexity to divorce. The best scenario is to clear debt before the divorce process."See related: After divorce, ex leaves joint debts unpaid, They divorced, he died, she's stuck with his $40,000 student loan, Credit Card Help: Why women need their own credit
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