Credit and Divorce
Mary and Bill recently divorced. Their divorce decree stated that Bill would pay the balances on their three joint credit card accounts. Months later, after Bill neglected to pay off these accounts, all three creditors contacted Mary for payment. She referred them to the divorce decree, insisting that she was not responsible for the accounts. The creditors correctly stated that they were not parties to the decree and that Mary was still legally responsible for paying off the couple's joint accounts. Mary later found out that the late payments appeared on her credit report.
If you've recently been through a divorce - or are contemplating one - you may want to look closely at issues involving credit. Understanding the different kinds of credit accounts opened during a marriage may help illuminate the potential benefits - and pitfalls - of each. More importantly knowing the pifalls in advance can get you prepared to take the correct action so you don't end up in the wrong situation.
There are two types of credit accounts: individual and joint. You can permit authorized persons to use the account with either. When you apply for credit - whether a charge card or a mortgage loan - you'll be asked to select one type.
Individual or Joint Account
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.
Advantages/Disadvantages: 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).
Advantages/Disadvantages: 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.
Account "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.
Advantages/Disadvantages: 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.
If You Divorce
If you're considering divorce or separation, pay special attention to the status of your credit accounts. If you maintain joint accounts during this time, 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. Make sure all cards get cut up or closed so they do not get accidentally used by your ex spouse.
By law, a creditor cannot close a joint account because of a change in marital status, but can do so at the request of either spouse. A creditor, however, does not have to change joint accounts to individual accounts. The creditor can require you to reapply for credit on an individual basis and then, based on your new application, extend or deny you credit. In the case of a mortgage or home equity loan, a lender is likely to require refinancing to remove a spouse from the obligation.
The Mortgage, the Taxes and Your Home
Avoid costly mistakes...
Deciding to separate a marriage is a very hard and difficult time. An unfortunately aspect of a divorce is the splitting of your combined assets. This includes your home.
By getting unbiased information on options about your home it will make vital decisions during this stressful time easier.
First you must to decide who if anyone wants to live in the house. Many times neither party wishes to stay in the home due unpleasant memories. Other times, there may not any choice on which party will stay at the house.
This report is here to help you understand what your decision will mean to you financially and where you will live. Can you afford to move? Will you have to refinance? If you do move what can you afford?
4 CHOICES
Here are your 4 fundamental choices on what to do with your property
1. Sell the house. Split the profits
2. Buy the house from your spouse.
3. Sell your part of the house to your spouse.
4. Have a joint ownership.
It is critical to know what these 4 choices mean
1. Sell the House Now and Split the Profits.
The number one goal in this situation is to capitalize your home's resale price. Consider your net profits carefully, e.g., your profit after selling costs. Remember that in the end the profits may not be equally divided. Factors that may influence the split include the terms of your settlement, the original source of the down payment, and the property laws in your area.
2. Buying out your spouse.
Consider the new income of your household. Are you dropping from two salaries to one? Are you able to afford the monthly mortgage payment? If you wish to maintain the house as your primary residence, these factors must be addressed. If the original mortgage was qualified with dual incomes, then you may face challenges refinancing on your own.
3. Being bought out by your spouse.
This a great opportunity for a new start with money in your wallet! One important caution, however: unless your existing home loan is refinanced, you will be considered libel for the mortgage, even though you are not the legal owner. This may pose a barrier in your eligibility for a new loan if you decide to make another major purchase, such as a new home. It is imperative that when your spouse buys you out they refinance the home wiothout your name on the mortgage or note.
4. You and your spouse retain joint ownership.
You may choose to delay the decision regarding possession of the home for a time, with one or the other of you remaining as a resident. This poses no short-term financial worries; however, be conscious of the tax situation. From the original time of the divorce to the final disposition of the home, the taxes on the home may change.
IF YOU DECIDE TO SELL
If and when the choice is made to put your home up for sale, an expert in the area of home sales can be invaluable in helping your maximize your profit. Input from both spouses is essential, regardless of differences, and they should both be represented when an agreement is drawn up. Also, all parties should read and sign the agreement, and continue to be participative in the negotiation process.
YOUR NEXT HOME PURCHASE
In this situation also a home sales expert can be invaluable in helping to sort out your needs. For example, what price range is reasonable based on the profits from
your home sale? What are your new space, use and location needs? Keep your first priority of getting what you NEED and WANT to suit your new situation.
PLEASE NOTE:
The material contained in this article is for information only. It is not intended to replace individualized legal advice. We strongly recommended you seek professional legal counsel for your legal issues.