Debt, Divorce, and Your Credit Score: What You Need to Know

It’s not the divorce itself that can negatively affect your credit — it’s the final settlement of who gets what.
6 minute read | 7/31/19July 31, 2019
Couple arguing about credit score and debt

Divorce happens. In fact, the National Center for Health Statistics reports that there were more than 787,000 divorces throughout 45 states in 2017. That number amounts to about 35% of new marriages in the same year. Given these statistics, it’s fair to say a significant number of Americans may face the challenge of working through a divorce sometime in their lives.

Like relationships themselves, divorces can be complicated and messy, especially when it comes to dividing up property and debt. This article will take a look at some of the different considerations that arise during a divorce when deciding how to divide the debt that has accumulated over time.

How debt is typically split in a divorce

Different states have varying laws that apply to what’s considered property and how it should be divided in a divorce. In nine states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — community property laws apply. Alaska residents may also opt into community property laws. In these states, the law generally looks at property that was acquired during the marriage as being owned by both spouses equally and will split it 50/50.

Other states go by equitable distribution laws, which means a court will look at all of the property the couple acquired during the marriage and determine how it should be fairly distributed between the spouses. This doesn’t mean a 50/50 split but a division of assets that takes into consideration additional factors, such as who will have custody of the children or how much each person contributed to the marriage financially, to figure out a fair settlement.

Debt that has accumulated during marriage can be considered property that needs to be divided as part of the settlement.

“When courts are looking to divide marital property, they take debt into consideration,” says Donna Cheswick, CDFA (Certified Divorce Financial Analyst) and financial advisor with Cheswick Divorce Solutions. “Often they try to equalize out debt so that no one spouse is overburdened unfairly. Or if one person takes on most of the debt, they are often getting additional assets to offset the amount of debt they are agreeing to be responsible for.”

Some couples enter into a prenuptial agreement before they get married. This is a legal document that states what property belongs to whom before and during the marriage; it can also have rules about how things get divided in a divorce. When a prenup is signed and is legal, community property and equitable distribution laws may not apply.

How credit card debt specifically is split in a divorce

How credit card debt is divided will depend on the state in which you’re divorcing, whether common property or equitable distribution laws apply, and if there are any prenuptial agreements in place. There can be some exceptions to this, particularly when you have joint credit accounts or use credit cards to pay for things outside the marriage.

“Typically credit card debt allocation depends [upon what] the debt was incurred for,” says Gabrielle Hartley, a family and divorce lawyer and author of Better Apart: The Radically Positive Way to Separate. “Was it for your new girlfriend's [Victoria’s] Secret underwear or a secret rendezvous, or was it spent on family expenses? Another factor that goes into the allocation or splitting of debt depends upon who actually has the ability to pay. Often the marital property is sold so that all debts will be paid off and the parties each can get a fresh start.”

With debt that has both spouses' names attached, such as a mortgage or joint credit card, each is responsible until the balance is paid off. This can put each of your credit scores in jeopardy, as you’re relying on someone else to make payments to an account with your name on it.

Hartley recommends settling as many joint debts as possible before leaving a finalizing a divorce. This can be done by selling off assets to pay these balances or simply paying off accounts with existing funds. If this isn’t possible, then it’s best to explore a legal agreement that obligates both parties to pay a set monthly amount into a new account for the sole purpose of settling the debt. You can also consider opening up a 0% APR (annual percentage rate) credit card to transfer the balance of your joint debt and save money on the interest while you both pay the debt down.

What about your credit card rewards?

Credit card points, miles, and rewards can be considered marital property, which can be included in a divorce settlement. Each card has its own policies about distribution or use of rewards, so check with the card issuer before making any decisions.

Cheswick says most rewards can be shared between cardholders if there’s a joint account. If the card is only in one person’s name or one spouse is just an authorized user, the points would likely belong to the cardholder and could be cashed in for goods, services, or cash back.

“This should be done prior to divorce and then the amounts received could then be split in some fashion between the parties,” Cheswick says. “Another option would be if one party is keeping all the rewards, then the other party could receive some other marital asset of similar value.”

How divorce can impact your credit

Divorce itself doesn’t have an effect on your credit. It’s the financial consequences of going through a divorce that can put your credit at risk.

“Divorce does not impact your credit,” says Eric Klein, a bankruptcy, matrimonial, and family attorney with the Klein Law Group. “It is the parties’ behavior as it relates to finances that impacts your credit score. For example, if the husband has a credit card in his name only and fails to make (a) payment on that credit card, the wife’s credit score will not suffer because the card is not in her name, even though she may be equitably responsible for half that debt in the divorce.

“The problem is that during a divorce, there’s so much anger between the spouses that the spouse who usually makes the payments to the credit card companies, in spite of themselves, just stops making those payments in spite of the fact it may damage that spouse's credit score as well.”

In the same vein, if an ex files for bankruptcy and includes joint accounts in the filing, that bankruptcy could end up on your credit record, or creditors could come after you to pay the full amount of the debt. Legal expenses, too, can be considerable and may put you or your ex at risk of missing or making late payments, as well as maxing out credit cards.

Refinancing a home or vehicle can also be part of a divorce settlement. This could result in hard inquiries on your credit reports, an increased amount of total debt, and a decrease in the average age of your credit — all of which can bring down your credit score.

How to protect your credit during a divorce

One of the first things you can do to protect your credit is to get copies of your credit reports from all three credit agencies — TransUnion, Equifax, and Experian. Comb through them to see exactly which accounts have you listed as a joint member and which have you as an authorized user. Also take note of how much is owed on each account; you may find there are outstanding debts you weren’t aware of.

Have yourself removed as an authorized user on any of your spouse’s accounts, then remove your spouse as an authorized user from your own. This will ensure your credit score is no longer impacted by your spouse’s actions on those accounts.

For accounts you hold jointly, see if you can come to an agreement as to how these debts will be paid or split. Then, if possible, open up new accounts in your individual names to distribute that debt to according to your agreement.

Remember that you’re still responsible for joint debt, even if your divorce decree puts payment responsibility on your ex. Lenders often don’t care about what a divorce court order says, and as long as your name is on the account, they will place delinquencies on both of your credit reports. This is why it’s important to try to get your name off the loan or account if possible.

Try to stay in communication through this final stage

As difficult as it may be, try to keep an amicable relationship with your ex so that neither of you feels compelled to make financial decisions that will negatively impact the other.

There may be no getting around marital debt other than simply paying it down, which can take time. Keeping things civil with your ex-spouse is a good way to ensure the plans and agreements you made during the settlement process are honored.

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