Just Got Divorced? Here's What Happens to Your Credit Card Debt
About 40% to 50% of all marriages in America end in divorce, and the rate was reportedly at a 40-year low recently. Getting at divorce rates is more complicated than it seems, as factors such as age at marriage and education influence the likelihood of divorce. Still, it's clear that a sizable chunk of marriages end earlier than they were expected to.
Divorce changes a lot of things for a former spouses, socially and financially. A key consideration is handling any credit card debt and determining who has what responsibility when it comes to paying off the accounts. Will it be handled jointly or not? Here's a look at what happens to credit card debt when you get divorced.
What you need to know about credit card debt responsibility
First off, understand that when you get a credit card, you enter into a contract with a credit card company, agreeing to pay off what you charge. When you divorce, there's also an agreement. You may agree that one party will bear the responsibility for paying off the credit card accounts, for example. That's well and good, but if you held that debt jointly and the ex-spouse who's responsible for paying it off doesn't do so, the other ex-spouse isn't absolved of any responsibility. The credit card companies aren't that interested in your divorce agreement.
One important factor is whether you live in a community-property state or not. (These recently included Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, with Alaska allowing people to opt in to it.) In a community-property state, both parties in a marriage are responsible for debt incurred during it, no matter who was responsible for any particular transaction. They are jointly responsible for all debt. The alternative is an equitable-distribution state, where both parties are responsible for debts on any accounts where they're both co-signers, but debt on cards where only one is the account holder is only the responsibility of that person.
What to do -- and not do -- regarding debt and divorce
There are lots of things you can do to make your life easier, financially speaking, when you're dealing with divorce or even if you're still married. For example:
- Don't rack up credit card debt in the first place. The average American household with credit card debt owes more than $16,000. Given that the national average credit card interest rate was recently 16%, the average debt-holding household is looking at having to pay more than $2,500 in interest alone each year. Whether your marriage is strong or on shaky ground, you'd do well to stay out of or get out of credit card debt .
- Since the party responsible for a credit card account's debt is the one (or the two) with their name on the agreement, you might agree to maintain separate credit cards, not jointly, so that if you end up parting, it will be clear who owes what. (If you already have accumulated debt, you could set up separate credit card accounts and transfer half or any portion to each of them.)
- If you have joint accounts for cards neither of you is using, you might cancel those, so that no joint debt can accumulate on them. If one party is an authorized user on the other's credit card account, it's smart to de-authorize that user.
- If one or both of you are continuing to use charge cards after separating, be sure to keep good records of who spend what on what. That can help support your ownership claims later -- and it will be the responsibility of the person who charged the amount to pay off that amount.
- If the party responsible for debt on an account doesn't pay, the credit card company may well pursue the other party in the marriage. You might protect yourself from being pursued for your ex-spouse's debt by including an indemnification clause in legal paperwork, but trying to get that enforced can still result in costly legal proceedings. In plenty of cases, it can be most cost-effective to just pay the debt.
- Rather than going forward into divorced life with credit card debt not paid off, see if you can find a way to pay it off -- perhaps with the home equity proceeds resulting from the sale of your home or from savings.
- If one or both of you are financially strapped and finding it difficult to pay off debts, consider visiting an accredited credit counseling agency for help.
- If one of you is considering filing for bankruptcy protection, know that the other party may then be stuck as the one with responsibility for any debt that had previously been jointly held. You can avoid this if both parties file for bankruptcy protection, but never do that lightly, as bankruptcy is not always a great solution to financial problems.
- Know that if you share responsibility for debt with your ex and he or she is not fulfilling their obligation, just ignoring the problem can be a bad idea. Debts unpaid will end up on credit histories and can significantly damage both parties' credit scores.
- It's always smart to go about separating and divorcing with a lot of information and guidance. Either read up on the topic as early as you can, or consult a divorce attorney. The former will, of course, cost a lot less than the latter.
Divorce is messy enough emotionally. The more you know about how credit card debt is or can be dealt with in a divorce, the less messy your financial life will be.
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