Allen settled with the help of her divorce lawyer on an agreement that split roughly $12,000 in jointly carried credit card debt down the middle, and extracted a promise from her ex that he'd repay an additional $7,000 charged to a jointly-held card after the two had separated.Then her ex refused to pay, and Allen learned that creditors don't care whether or not you're doing the "right thing" or how the divorce courts assign responsibility for payment. For them, it boils down to this: If your name is on the account, you're legally liable.
"I was going to have to pay it because my name was on those cards and he didn't do what he was supposed to do," she says. Allen struggled to pay both her and her ex's obligations, but when the financial meltdown hit in 2008 and issuers raised her interest rates to as high as 24%, she fell behind and began defaulting. She's scheduled to file for a Chapter 13 bankruptcy next week to avoid the prospect of wage garnishment or losing her house (on which she's kept current in her payments).
Breaking Up with Lenders Is Hard to Do
While each of us has an individual credit history, report and score, the actions of a romantic partner -- especially an estranged or ex-partner -- can still skewer an unsuspecting person's score.
"The divorce is from your spouse, not your lenders," says John Ulzheimer, president of consumer education for SmartCredit.com. "If the accounts are mismanaged even after the divorce, then it will still hurt both spouse's scores," he tells WalletPop, adding that what he terms "malicious spending" is unfortunately common in acrimonious divorces.
"Where it can get dicey is if you have joint credit accounts or joint loans where both names are on them," says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling. "If somebody's mean spirited enough, they don't care if their credit tanks. They're just vindictive enough to take it out on the ex-spouse." Allen says this is what happened to her, adding that even as she struggled to pay for groceries, her ex tried to have his child-support payments for their two children lowered.
While we can't touch on all the reasons a marriage can fail, the first step to avoiding a financial firefight is to have a frank talk about money, spending and finances early in the relationship, says Adam Levin, chairman and co-founder of Credit.com. "You really need to have as much of a big talk about credit as you do about all the other things. Before you exchange vows, it's not a bad idea to exchange credit reports."
It's a common impulse for the partner with stronger credit to want to lend a hand by cosigning a loan or adding them as an authorized user to a credit card account. But if the relationship goes south, this charitable gesture could come back to haunt you.
An alternative, if you want to help out a partner with poor credit without placing your own at risk, is to offer an asset -- say, a CD or small amount of saved money -- that can be used as collateral for a loan or as the backing for a secured credit card. Yes, you run the risk of that money disappearing if your partner takes advantage of your generosity, but you'll avoid having your credit score dragged through the mud.
Divorcing Yourself from the Debt
When a partnership is on the rocks or headed for a split, experts say the best way to protect yourself is to move quickly and disengage yourself from the other party financially. "It's particularly important to do this before divorce proceedings in case your disgruntled spouse racks up charges you'll be held responsible for later," says Loretta Worters, vice president of the Insurance Information Institute.
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As long as there's an outstanding balance on a joint account, both parties are responsible for payment. Generally, any debt incurred by one spouse is also the responsibility of the other, regardless of whose name is on the account until after the divorce. SmartCredit's Ulzheimer says it's crucial to close joint credit cards and remove your spouse as an authorized user.
If you only have joint credit cards -- a precarious position to be in -- you first need to establish a line of credit of your own. Since processing an application for credit can sometimes take several days, it's not a bad idea to do this just in case, even if there's presently no discord in the relationship. Recent changes to the law may make it more difficult for stay-at-home spouses with no independent income to obtain credit, so it's important to get credit when you can.
When you're closing those joint accounts, don't forget about retail cards, says Ulzheimer. "I can tell you sometimes consumers forget about them, those retail store cards that you only use periodically," he says. "If they're still joint accounts, they're just as dangerous."
Believe it or not, credit cards are the easy part of the equation. Barry Paperno, consumer operations manager at MyFICO.com, told WalletPop it's much tougher for couples to untangle installment loans like car loans or mortgages -- for which both partners might have signed on to qualify for the loan or for a better rate.
Divorce or not, Paperno says, a mortgage in both names means you're going to have a relationship for as long as that loan is in place. Ideally, one partner could buy the other out of a car loan, but it's almost impossible to refinance into just one partner's name without paying a hefty amount, since cars generally depreciate faster than they're paid off.
These days, with the real estate market still struggling, the same holds true for many homes. Ideally, the spouse who wanted to stay in the house would refinance the loan in just his or her name, as Allen did. Today, though, so many homes are under water and lenders have tightened their standards so much that a single income might not be enough to qualify for a new mortgage.
Keep Frequent Tabs on Your Credit Report
Experts say the best thing you can do if you're in the process of a separation or a divorce is to keep a close eye on your credit report. "As early as possible in the divorce process, pull the most recent copy of your individual credit reports from one of the three main credit bureaus," says Worters. "This is something you should do at least once a year, but it's especially important after major life events such as a divorce. By checking your credit score, you can see if your credit's been adversely affected by the impending divorce. It will also show if there are any shared debts that are being neglected and can point both of you in the right direction when canceling any joint accounts."
MyFICO's Paperno says people getting a divorce or separation should seriously consider a credit-monitoring service, both so that they can make sure that their spouse is making good on his or her payment promises as well as ensuring that their soon-to-be ex isn't taking out loans in their name.
"It's a good idea for people to protect themselves through a credit monitoring service," he says. Paperno points out that while identity theft might not be something most of us think about on a daily basis, a former partner has all kinds of information, like your Social Security number and mother's maiden name, that could give them the key to fraudulently obtain credit.
As for Allen, she's hoping the bankruptcy settlement -- which will put her on a five-year repayment plan, after which the remainder of her debts will be discharged -- will help her put her credit nightmare behind her. It's a bitter pill, she says, that she tried to follow the rules only to have her credit score dragged through the mud, but she's looking forward to the future. She says she's already planning to sign up for a secured or low-limit credit card as soon as she's eligible to apply for one to start rebuilding her score. "I just want to live my life and pay down my debts," she says.