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Wednesday, November 5, 2008

Credit Card Debt in Divorce

While divorcing couples frequently carry credit card debt, often little attention is paid to these debts beyond their being assigned to one spouse or the other in the divorce judgment.

Care must be taken that a spouse will not be held responsible for additional credit card debts incurred by the other, and that each spouse is protected to the maximum extent possible if the other fails to make payments and ultimately to pay off their share of any joint credit card debt.

Remember: Creditors are not obligated to respect the terms of your divorce judgment.

Assigning Responsibilty for Credit Card Debt

Often the parties to a divorce will assign to each spouse the responsibility for specific credit cards and their associated debt. To help ensure that all joint debts are identified, including any credit cards which may have been taken out by one spouse without the other's knowledge, it may be beneficial to get copies of the credit reports of the divorcing couple, and to make sure that the debt from any creditor not paid off in full is assigned to one spouse or the other.

Cutting Off Your Liability For Additional Debt

When you divorce, you should make sure that you either close any joint credit cards, or that at a minimum you have your name removed from any joint accounts which will continue to be used by your spouse. This will not end your liability for debts incurred up to that point, but should end your responsibility for any new debts incurred on those accounts by your spouse.

Similarly, if you hold any accounts in your own name for which your spouse is an authorized signer, you should revoke the authorization.

Protecting Yourself From Default or Bankruptcy

It is not unusual after a divorce for one spouse to fail to pay off a joint credit card debt which predates the divorce. If appropriate steps weren't taken to cut off liability, sometimes a joint account will remain open with both spouses liable for the new charges, even though the new charges are made after divorce. The debt load on these cards, delinquent payments, and any default or referral to a collection agency, will appear on the credit reports of both account holders. The creditor will also be able to pursue either or both account holders for payment, including interest, penalties, and possibly legal fees. The creditor does not have to be fair - if it wants, it can direct all of its collection efforts at the innocent spouse.

Thus, a divorce judgment should include a deadline by which the joint credit card debts allocated to each spouse will be paid off in full, and provide for appropriate remedies in the event that repayment does not occur. Note that refinancing credit card debt is often as simple as applying for a new credit card and requesting a balance transfer.

There should be a "hold harmless" clause in the divorce judgment which prevents the spouse who is responsible for the debt from trying to shift any responsibility back onto the other spouse, and an "indemnification" clause which requires the spouse who is responsible for the debt to repay any losses suffered by the other spouse, including any payments made toward the debt by that spouse, or legal fees incurred in defending against a collection action or returning to court to compel compliance with the terms of the divorce judgment.

There is also language which can be included in a divorce judgment, which can help protect an ex-spouse from being left without recourse if the other spouse declares bankruptcy before paying off the credit card debts. Ask your lawyer if it is possible to include language which will make the spouse's obligations under the divorce judgment non-dischargeable, or significantly less likely to be discharged, based upon the manner in which the debt and repayment obligation are characterized in the divorce judgment, for example by characterizing the timely payment of the debt as being necessary for the support of the other spouse.

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