Divorce – A Potential Credit Disaster
Most people know that divorce proceedings can be very costly in terms of time, money, and tears. Many people have the foresight to plan for the financial strain of divorce through the negotiation of a pre-nuptial agreement. However, what many couples fail to consider, and what may come back to haunt them years later, is the effect that a divorce may have on your credit.
While not an immediate financial cost like court fees and distribution of assets, the potential damage to credit can have negative implications on a life long after the divorce has faded from memory.
How does this credit disaster take place? The root of the problem is that lenders are not required by law to honor court decrees which place the burden of paying off a joint loan on the shoulders of one party.
In other words, even if a court decides that Spouse A is responsible for paying off a loan that Spouse A and B took out together during their marriage, the lending company may still hold both A and B accountable for the debt.
If Spouse B mistakenly assumes that he or she is no longer bound to that financial obligation, he or she may be penalized for missed payments which destroy his or her credit score.
Of course, there are ways to minimize the risk that divorce poses to your credit. For example, if a divorce is brewing, you should start preparing your finances by splitting joint bank accounts, refinancing mortgages and car loans, and converting credit card accounts.
You should also plan for the possibility that a bitter former spouse may try to take revenge on you by, for example, applying for credit cards in your name and ruining your credit. To prevent this, you can choose to opt-out of receiving pre-screened credit card and insurance offers before the divorce actually takes place.
Credit Accounts and Divorce
There are two types of credit accounts that people can open: joint accounts and individual accounts. The type of account that married individuals open can have a major effect on who has to pay back the debts in the case that divorce occurs. First, however, it is important to provide basic information on both types of accounts.
When a married couple opens a joint credit account, for example for a credit card, then both of the spouses’ credit history and income/assets are considered when the creditor is deciding whether or not to grant the credit. Should the spouses be granted credit, both spouses are responsible for paying back the debt associated with the account.
When a married individual opens an individual credit account, however, the opposite happens. Only that individual’s, and not his or her spouse’s, credit history and income/assets are considered. As a result, only the spouse opening the individual account is responsible for paying back any debt linked to the account.
When Divorce Comes into the Picture
When people decide to get divorced, the type of credit account affects which spouse has to pay back the debt. If the debt is for an individual account, then the spouse who opened the account has to pay back the debt. For a joint account, however, both spouses are responsible for paying back the debt. Even if the spouses agree that one of them will pay back the debt, the creditor can claim money from the other spouse, as the creditor was never a party to the divorce agreement that the spouses signed. As far as the creditor is concerned, the debt would still be part of a joint account.
Contact a San Diego Divorce Lawyer
If you are going to get divorced, debts are only one concern. The legal requirements can be a serious burden. To get the legal assistance that you need, contact the San Marcos divorce lawyers of Fischer & Van Thiel, LLP by calling (760) 757-6854.