Debt And Divorce - The Bitter Truth

Debt and divorce go hand-in-hand like peaches and cream, only it's definitely not so sweet.

By Tracy Achen, Divorce Transition Coach

If you've been married for any length of time, it's almost certain that you and your spouse have some marital debts. How these debts are handled during your divorce can make a big impact on your credit long after the two of you split.

Where You Live Can Determine Your Debt Responsibility

In community property states, both spouses may held be liable for debts incurred during the marriage, regardless of whose name is on the account. For example, one woman had to pay off a debt that she knew nothing about (her husband had opened this account in his own name during the marriage). I know, it's not fair, but that's the way the credit laws work for such states. This is something you really need to take into consideration if you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin.

If you do live in a community property state, be sure that your divorce decree includes a provision that will indemnify you if your ex defaults on a separate account. It won't stop the creditors from pursuing collection, because an indemnity clause is only binding between the spouses. But having an indemnity clause will allow you to take your ex back to court for reimbursement of any money you had to pay the creditors. An indemnity clause also allows you to dispute any of your ex's loans if they show up on your credit report.

Both spouses are liable for joint credit accounts

When two people apply for credit together, each is responsible for repaying the debt. This is true even if your divorce decree assigns the debt to your spouse. If an account goes into default due to non-payment, both spouses will be held liable since creditors are not bound by a divorce decree. On top of that, your credit score will drop, which will make getting credit in the future harder.

With this in mind, if you maintain joint accounts during or after your divorce, be sure to make regular payments so that your credit score won't suffer. As long as there's an outstanding balance on a joint account, both of you are responsible for it.

How to handle joint debts

You should consider closing joint accounts that were opened in both of your names, as well as removing your spouse as an authorized user on your own accounts. You can also ask the creditor to convert these accounts to individual accounts. Since creditors aren't obligated to convert such accounts, you may need to apply for credit on an individual basis. The creditor will then extend or deny you credit based on your new application.

Ideally, you should pay off as many joint debts as possible before the divorce is finalized. This makes settlement negotiations easier and helps make for a cleaner break.

If paying off the debts or converting joint accounts to individual accounts isn't possible, then you want to make sure to monitor the accounts that you are responsible for. If you notice that payments are being made late, you might consider making the payments yourself to protect your credit. After all, bad marks can stay on your credit report for seven years, and do you really want to be reminded of your ex for that long? 

Tracy is the editor of WomansDivorce.com and author of Divorce 101, a guide to help women navigate the complexities of divorce.

Now that you understand some of the general issues surrounding debt and divorce, continue reading to learn how to best handle the debt division, as well as steps you can take to protect your credit:

• Dividing Debts - What to Consider
• Secured Loans on Shared Ownership Property
• How to Protect Your Credit During Divorce
• Student Loans and Divorce 

Updated November 19, 2022 

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