When Joan divorced several years ago, her ex agreed to pay off the couple’s $20,000 in credit-card debt. They made the agreement part of their official divorce decree.
That, Joan thought, was that. Except every couple of months since then, creditors have called her because her ex has missed a payment. Despite the divorce agreement, she’s still on the hook, and all the late payments have trashed her credit.
"I just assumed my responsibility ended" once the divorce was final, said Joan, a Los Angeles homemaker who asked that her last name not be used. "But it turns out that’s not true."
Many divorced people learn the hard way that creditors don’t care how property and bills are divided in a divorce. If a debt was incurred in a joint account, both spouses are responsible for paying it back.
Don’t expect a phone call. Your agreement with your creditors predates your split, explains divorce attorney and financial planner Amy Boohaker of Sarasota, Fla. You can’t force a creditor to abide by an agreement you make later with your spouse.
And not every divorced person gets a phone call to notify them that their ex is in arrears. It was only after Atlanta resident Tony Martin pulled his credit report, for example, that he learned his ex-wife had failed to pay the mortgage on the family home she received in their property settlement. Since his name was still on the loan, the foreclosure will remain a major blot on both of their credit reports for seven years.
In an ideal world, divorce attorneys would alert the clients to these dangers and help them protect themselves. In reality, the discussion may never happen. A couple may not use an attorney, or the lawyer may not be fully aware of the credit problems an irresponsible or vengeful ex can cause.
You need an action plan. "How many divorce attorneys sit down with their clients and talk about how they’re going to handle joint debts?" Boohaker asked. "They let [the clients] go off and solve that on their own."
Martin’s experience prompted him to help start a business to help people protect their credit in a divorce. DC Processors of Southlake, Texas, contacts creditors and arranges for accounts to be closed or frozen.
Shutting off the tap before a divorce is final, Martin says, can prevent years of headaches afterward. But even if it’s too late to close that particular barn door, you may still be able to contain the damage.
Here’s your action plan, starting with unsecured accounts, such as credit cards and personal loans:
Identify your vulnerable accounts. You need to track down each and every credit account your spouse could access, either as a joint borrower or as an authorized user. (Authorized users are typically added after an individual account is opened. Unlike joint borrowers, authorized users aren’t contractually obligated to repay any charges they make.)
In addition to the accounts you use frequently, you’ll need to look for ones you haven’t used for years, such as all those department store cards you opened to get 10% discounts.
You can search through your old paperwork to find these records, but it’s probably quicker and more effective to get your credit report from each of the three major bureaus–Experian, Equifax and Trans Union. Or you can get all three reports consolidated, since one may list credit accounts the others missed. Then:
- Make a list of all the accounts that are listed on your reports as "open". The credit report will show whether the account is joint or individual, but may not indicate whether there are other authorized users. For that, you typically have to ask the creditor directly.
- Find account numbers for each open account. You’ll need these when you call the lenders, but your credit report will list only partial numbers. Now’s the time to drag out your old paperwork and start sifting.
- Get contact information for each creditor. Customer service numbers are typically listed on the back of the credit card or printed on monthly bills. If you don’t have a card or a bill, try the number listed on the credit report. (Although this is often a number meant for lenders only, you may be able to get them to connect you to customer service.) If all else fails, use an Internet search engine to track down contact information for your creditor.
Decide what to do with each account. You can:
- close the account
- freeze the account
- remove authorized users from the account
- leave the account alone
Ideally, you would close all your joint accounts. If you owe a balance, however, credit card companies typically won’t let you close the account, so you may have to settle for freezing it to prevent future charges. A freeze keeps you from using the card, too, so make sure you have plastic in your own name first. Once the account has been frozen, the balance can be paid off or, better yet, transferred to the responsible spouse’s individual account.
A side note: Closing old accounts and opening new ones can have a negative effect on your credit score, said Craig Watts, spokesman for Fair, Isaac & Co., which creates the leading FICO credit score. That’s why it’s important to apply only for the credit you need, not half a dozen new cards, and to close only those accounts that are vulnerable to being misused.
But don’t put off taking action because of credit score concerns. The dings you get are likely to be slight and far outweighed by the potential damage an ex-spouse can wreak if you don’t get this done.
Contact the creditor. Call to ask the creditor to make a note in your file that you’ve split with your spouse and explain how you want the account to be handled. If you’re able to close the account, request that the creditor report to the credit bureaus that the account was closed at your request.
Make it clear that you will not be responsible for any further charges as of the day you call, Martin said. Take notes of your conversations, including times, dates and contact names, and write down any instructions the creditors give you for what to do next.
Follow up. As soon as possible after your telephone conversation, follow up with a letter recapping what you’ve told them. Ask them to send you written confirmation that they’ve taken the action you requested. Keep all this paperwork in case you run into problems later.
In a couple of months, order your credit reports again and review them to make sure the accounts have been properly handled. If an account is listed as open that should be closed, or if the reported balance on a frozen account has grown, contact the creditor again immediately.
Meanwhile, make sure the bills are getting paid. This is key. Divorce negotiations can take months, and all it takes is one late payment to hurt your credit. Make sure that doesn’t happen, even if you have to make minimum payments on accounts that will ultimately be your spouse’s responsibility.
If you’re already divorced and your ex is falling behind on a joint debt, you may need to start sending in the payments yourself, or even pay the debt off entirely, to protect your credit. You may be able to recoup these payments from your ex; Martin recommends checking your divorce decree to see if it gives you any recourse in these situations. (This should be a standard feature, but if you had a bad lawyer or did it yourself, it might have been left out.)
That takes care of unsecured accounts. Secured loans–those used to buy an asset such as a house or a car–can be even trickier for joint borrowers. Failing to pay these loans on time can lead to foreclosure or repossession and can be a huge hit on both your credit reports.
You have three choices with secured loans:
- Sell the asset. This is the cleanest choice, since you can pay off the loan and divide any proceeds from the sale.
- Refinance the loan. This is the second-best choice if your ex has enough income and good credit to qualify for a loan in her own name–or can convince a relative to co-sign the loan. Ideally, you would hold off making your divorce final until the refinancing was completed.
- Remain on the loan–with conditions. Sometimes it’s not possible to sell or refinance before divorce proceedings are finished. Perhaps your ex will continue to live in the family home with the kids, but can’t qualify for a refinance on his own.
In this case, attorneys say, it’s usually best to set some kind of time limit so that you’re not on the hook forever. You might agree, for example, that when the kids are 18 the home will be sold if your ex still isn’t able to refinance.
To further protect your credit, consider having the lender send the loan statements and payment coupons to you at your new address, or get Internet access to the account. That way you’ll be able to see if your ex is falling behind and perhaps step in before both your credit ratings suffer.
The loan and the title. You also can encourage your ex to put the payments on automatic by having the lender deduct the monthly bill directly from his checking account. That will ensure the bill is paid on time each and every month.
But here’s an important tip for secured loans: Don’t allow your name to be taken off the title if your name is still on the loan. You don’t want to be responsible for the debt if you no longer own the asset.
All this is stuff Joan wishes she had known before her divorce was final. Her ex’s credit is too bad for him to get credit cards in his own name, so the debt can’t be transferred off their joint cards. If she decides to pay the bill herself, she has little recourse against him, since he has no property for her to put a lien against. She would have been better off taking on the debts herself, she realizes now, and getting a bigger property settlement to offset the liability.
"You’re always relying on his good behavior," Joan said. "If he’s not responsible, you’re in a no-win situation."