Problems With Divorce & Debt

Not every married couple achieves their “happily ever after.” A 2009 National Vital Statistics report from the Centers for Disease Control and Prevention illustrates that approximately half of all marriages end in divorce. During a divorce, you and your spouse must negotiate the division of all marital debts and assets before the court will finalize your divorce petition. While dividing assets isn’t easy, dividing debts can sometimes present an even greater problem.

Debt Liability

Both you and your spouse are liable for jointly accrued debts, such as joint credit card bills and mortgage payments. Although your divorce decree should clearly state which of you assumes responsibility for which debt, your creditors retain the right to demand payment from the person whose name appears on the original contract.

Joint liability may lead a vindictive individual to accrue large amounts of debt on accounts for which his ex-spouse is still legally liable. This places you in particular danger if you are more financially stable than your ex-spouse, since creditors often legally pursue the individual most capable of repaying the debt. If possible, close and pay off all joint accounts prior to divorcing to prevent any unpleasant financial surprises later on.

Credit Damage

Even if you close credit accounts you share with your spouse prior to divorcing, you remain responsible for any remaining debt until it is paid in full. If your spouse accepts responsibility for debts that appear on both of your credit reports yet fails to make timely payments, your credit history could suffer as a result. The Fair Isaac Corporation, which is the company responsible for calculating FICO credit scores, states that consumer payment histories make up 35 percent of each credit score. Thus, your ex-spouse’s late payments on joint accounts can hurt you, since joint account histories appear on both account holders’ credit reports.

Buying Power

When you apply for a mortgage or vehicle loan, your lender will pull your credit report and evaluate not only your credit score but how much you owe other lenders. The goal is to ascertain that you can comfortably afford to take on additional debt. If the courts award your ex-spouse ownership of a home or car you jointly financed and she merely takes over the payments without refinancing the item into her own name, you remain legally obligated to repay the debt. This is true even if your ex-spouse makes prompt payments each month without your assistance. Because the debt is still technically your financial responsibility as well, it can hurt your ability to obtain future financing.

Community Property States

In most states, you and your ex-spouse share liability only for joint debts. Any debts your spouse accrued on his own are not your financial responsibility. If you divorce in a community property state, however, you may be held responsible not only for joint accounts you share with your ex-spouse but for his individual debts as well. This presents a significant problem if your spouse carries hidden debts you aren’t aware of, since his creditors may sue you for payment on accounts you did not know existed.