Credit Considerations in Divorce
Here are some important considerations regarding your credit and outstanding debts when getting divorced.
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While the beginning of a divorce is an emotional and confusing time, it is also the most important time to look into and discuss your credit situation with your attorney. This is the time to look at your mortgage, equity lines of credit, your joint credit cards and any other credit that you and your spouse may have outstanding. Your attorney and possibly a financial professional will be the best people to help you make a plan for these accounts, however, below are a few informational facts that can help you start to understand your financial situation.
A joint account is one that both you and your spouse have signed for and both have responsibility for. The most obvious one might be a house mortgage, but there are others that you might not have considered. If a credit account, either for a credit card or a loan is in both of your names, you are both legally obligated to pay it back. At the beginning of a divorce, it is very wise to cancel all joint accounts so that your spouse cannot run up debt that you might end up being responsible for. This, of course, cannot include your mortgage which will be divided as part of the equitable distribution as it is a loan secured by a marital asset.
There are various other credit accounts that you might have that are not considered joint accounts. One of these is for instance a credit card, that you opened in your name and have made your spouse a user of. This is not a joint account and if your spouse decides to use the card they have been given and starts charging on it you will be responsible for the debt. It is a wise idea to close all of these accounts also and then open accounts in your name only and do not allow anyone else to use the account. Obviously, accounts that are in either of your names alone and you have not given your spouse permission to use are considered the debt of the person named on the account after the date of separation.
Marital debt is debt that you both have accumulated during the marriage and which is usually divided in the equitable distribution which your attorney will explain to you. However, the most important thing is when it is no longer considered marital debt. In community property states, it will be when the divorce is final. In other states it will be when that state determines that you have separated. You need to discuss this with your attorney as to how it applies to you in your particular state as anything before that date is considered marital debt.
There is often a question of what happens to one party if the other one files for bankruptcy, particularly a Chapter 7. If the bankruptcy is granted then the party that filed will be freed of the debts and the creditors may well look to the other party to pay, particularly in a joint account. If the federal court has made this decision, the other party may have to turn to bankruptcy themselves. If you carry a large amount of debt it might be beneficial to for you both to file a joint bankruptcy prior to the divorce.
(To learn more, please see this article on Family Law, Divorce, and Bankruptcy).
The IRS can look back for three years and you definitely need advice from your attorney and possibly an accountant to consider any income tax debt that your spouse has that might be applied to you.
Both you and your spouse want and need to have a good credit rating to start accumulating individual credit after the divorce. The first proactive move you can make is to check what you credit rating is right now. You are allowed one free report a year from the three foremost credit reporting agencies and the place to start is on several websites. You need to look for unusual charges; even identity theft issues and charges that your spouse may have made that are on your report. A divorce does not have to have an adverse effect on your credit rating, but it certainly can happen without care.
Don’t Work Alone
It may all seem very daunting and this is why you need to get advice and help from other people. Obviously your attorney if one is handling your divorce, your accountant and anyone that has knowledge of financial issues.