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We’re Separating – What Happens to Our Credit Card Debt?

Couple separation and financesMore than half of all marriages in the U.S. end up in divorce. If you’re currently experiencing the demise of a relationship, your credit score might be the farthest thing from your mind. But joint accounts are the single biggest cause of credit damage after a divorce, according to credit expert John Ulzheimer, so it’s in your best interest to understand how the separation will affect your finances, your credit score and your financial future. Intelligent financial planning can help you avert a financial nightmare on top of the emotional stress caused by the relationship woes.

What happens to our accounts?

Separate accounts do remain separate, but what happens with the debt held in separate accounts depends on where you live. In community property states, both spouses are responsible for all credit card debt, even if was incurred by only one spouse. Also, you could be held responsible for your spouse’s separate credit card debt if it was incurred for the benefit of the couple or the family (vacations, for example). In most cases you will not be held responsible for your spouse’s separate debt incurred after the date of your separation. But if the charges were incurred for necessities, such as groceries purchased by a non-working spouse, you could be held responsible for the debt even in separation, and even on a separate account. Separation and divorce can be very complicated and messy.

Joint accounts do not become separate, even upon legal separation. In some cases, separating couples can obtain a court order that sets forth payment responsibilities. A court order, however, does not guarantee payments will be made. As long as your name is on the account, you are responsible for the debt according to the terms and conditions that govern the account, no matter who makes the charges.

Delaying divorce

Separation and divorce generally lead to a steep rise in expenses for both people. As a couple, you made one mortgage or rent payment; as exes you must pay two. As a couple, you were covered by your spouse’s employer-sponsored health insurance policy; upon divorce, you lose that coverage.  For these and many other reasons, many couples delay divorce and may even continue to live together.

Realize that some people become surprisingly spiteful and vicious during divorce. If there is any chance your spouse might deplete marital assets or willfully spend money that belongs to both of you, delaying divorce could be quite costly.

Tips for handling debt in separation

  1. Document the status of your marriage and your debt. Follow your state’s laws with regard to legal separation so that there is no question regarding the date of separation and other details that could affect finances. Obtain a current copy of your credit report and the most recent statement for each asset and liability account in order to document the status of your finances at the time of separation. Use real-time data by accessing your accounts online and printing up-to-date activity.

  2. Separate all accounts. As soon as possible, and even while the final outcome of the relationship is still unknown, separate all accounts. Freeze joint credit card accounts that have a balance; close joint accounts that have no balance. If one person is responsible to pay off the balance on any joint account (and is willing to acknowledge and accept that responsibility), transfer the account to that person only. Have your name removed from the rental lease if you move out of the home.

  3. Agree on a budget. Stay-at-home spouses are especially at risk of financial difficulties, and should act early and assertively to protect themselves by working out agreements on the budget and bills. If you suspect any lack of cooperation, move forward with divorce proceedings quickly.

  4. Separate assets. Set up separate bank accounts and start contributing separately to joint expenses. Use joint accounts only for joint expenses, and only after you’ve both contributed the agreed-upon amount each pay period or month.

  5. Put everything in writing. Avoid faltering memory and disagreement caused by further degradation of the relationship. Write down every detail with regard to finances and include both spouses’ signatures.

  6. Monitor your credit. It’s imperative that you remain aware of any debt that you are jointly or solely responsible for, and that you continue to make payments. Even if your spouse is responsible for paying the debt, if he or she chooses not to your credit will quickly suffer.

Working together toward financial agreement is the best thing you can do during this trying time to protect both of your credit scores and histories.

Author Bio:  Kimberly Rotter writes for Credit Card Insider.

Image courtesy of FreeDigitalPhotos.net


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13 comments
Thomas @ Your Daily Finance says June 6

Living in a community state is big. Many people don’t look into or even realize that depending on the location you are you may still be responsible for your spouses debt. I know a lot of people who are still married because they cant get rid of the house they are living in together.

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    Grayson says June 6

    You are correct Thomas. Many people don’t know the laws.

    Reply
DC @ Young Adult Money says June 6

I believe stay at home spouses are also entitled to some sort of alimony because the other spouse benefited from them staying at home and having that free time available to clean the house, run errands, etc. Putting everything in writing is key! I have a friend who didn’t want to go through a lawyer for their separation, but I urged him to go to one so they would have all their bases covered.

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    Grayson says June 6

    It is all about putting things in writing and discussing it up front.

    Reply
Greg@ClubThrifty says June 6

Yuck. I’m glad that we have never had to do any of this. What a mess.

These are important tips though. Thank you for sharing. I’m sure that you have helped somebody today:)

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Matt Becker says June 6

I’m with Greg on this one. Really glad we haven’t had to deal with this. Divorce can be so messy and finances only add to it. This is a big reason why I think some recent articles touting the financial benefits of marriage can be so dangerous. There are certainly financial benefits to a GOOD marriage, but marriage itself is not a route to happiness. That kind of cavalier mindset is the kind of thing that gets many people into trouble.

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John S @ Frugal Rules says June 6

Like Matt & Greg I am so glad we have never dealt with this & do not plan on it. Having worked in the financial industry, it’s crazy how people get when going through a divorce. They do some shady things that I would not do to my worst enemy.

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SuburbanFinance says June 6

Divorce is hard enough without having to worry about credit card debt! I can only imagine the stress if you had to take on your spouses’s.

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Jake @ Common Cents Wealth says June 6

I’ve heard divorce is incredibly difficult. Not only emotionally, but monetarily as well. One piece of advice that I’ve heard is to make sure each other are taken off of the other person’s accounts and debts. There are too many horror stories out there where one spouse kept the house (while the other spouse stayed on the loan) and then got foreclosed which resulted in both of the spouses’ credit scores being affected.

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Sean @ One Smart Dollar says June 6

This is a really good post. I had no idea what would happen to the debt if a couple got divorced. I would like to think I will never be in debt and never be getting a divorce.

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Edward Antrobus says June 6

I think that while half of marriages end in divorce, not half of people who get married get divorced. I have three coworkers who have been married 8 times between the three of them and divorced 7.

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thepotatohead says June 6

Picking who you marry is probably the biggest financial decision you’ll ever make since if things go south, your financial situation can turn bad real quick. Good thing to have full disclosures and discussion upfront about how to handle finances in the event of divorce. Like others said also good to know the state laws.

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Alex says June 7

Great tips to be aware of. I’m just hoping I’ll never need to make use of them!

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