The interplay between shared credit cards and financial liability is complex, and much more so when working through a divorce. Prenuptial and postnuptial agreements attempt to straighten out the asset and debt details upfront, but when such an agreement is not in place, it will take an expert to sort everything out. In some cases, the idea of facing financial hardship or ruinous credit can compel someone to stay in a marriage they would otherwise seek to dissolve. If someone is caught in an abusive marriage because of credit card debt or financial insecurity, they can feel like a prisoner facing a life sentence. However, though credit card obligations cannot be changed through a divorce, there may be options for resolving debt.
Who is responsible for credit card debt?
Combining finances is a decision with enormous implications, and a decision that many couples do not weigh carefully before taking the plunge. This is particularly true when it comes to credit cards. A common misperception regarding credit cards is that when someone is added onto an account, they assume joint responsibilities for any debt accrued and place their own credit health on the line. This is not usually the case.
The only joint credit card account is one that both people open together, with both parties submitting a co-application and putting their name on the dotted line. Some credit card companies have made it more difficult to form a joint account in recent years, so even when a couple wants to share account responsibilities, it may not be easy.
If putting two names on one account is the goal, then there is only one alternative to a joint account – designating the other party as an authorized user. More and more couples are turning to this option because it can be done with an existing account and is generally easier. However, there are serious pitfalls associated with authorized user status, for both parties. What are those pitfalls?
- For the account holder – With a joint account, both parties assume responsibility for paying any debts and are both at risk of sustaining damage to their credit if they don’t. That is not the case for an authorized user. An authorized user has the privileges of an account holder, in that they can use the card freely and charge to the limit of the account. However, they owe nothing to the credit card company. That responsibility lies solely with the account holder. As such, an authorized user can put the account holder in a terrible spot by accruing debt and suffer no consequence if the debt is not paid.
There is obvious room for abuse here, as an authorized user can even use the credit card to pay for their legal costs associated with marriage dissolution, and force the account holder to resolve the debt. The authorized user may pay their lawyer with the card; and owe nothing to the credit card company. An account holder may fear leaving a marriage if there is debt present, as they may have to face the credit card company alone.
- For the authorized user – An authorized user may not be weighed down by debt, but in most cases, they are not building credit either. When credit card companies pull an account’s history, the authorized user may not even be acknowledged. If they are, it is at a reduced capacity. As anyone familiar with credit scoring knows, no credit is just as crippling as bad credit, so someone who has relied on their authorized user status for years may find themselves without viable credit options once they are taken off of the account.
In an abusive marriage, this can be held over the authorized user’s head, as without a robust credit history, it can be difficult to to rent a residence or make purchases on credit, like a vehicle or furniture.
In either case, someone can get trapped between financial turmoil and a worsening marital situation. Unfortunately, there isn’t always an easy solution to this. Judges cannot nullify a contract between an account holder and the credit card company, and the debt will have to be paid off one way or another. That being said, Texas is a community property state and a judge can order debt mitigation processes that can save someone from being buried in credit card debt. Some of the ways to deal with credit card debt during divorce include:
- Selling community assets – Texas is a community property state. That means most property acquired during the marriage is owned by both parties. In other words, even if only one person has their name on a mortgage title, the house is usually still community property. Divorce courts have to determine whether or not an asset or debt belongs to the community estate. If debt was accrued to benefit both parties or the community estate, then the debt will most likely be considered an obligation of the community estate. If the debt was incurred for something inappropriate, like a gambling debt, then it will likely be assigned to the debtor.This is an important process, as a judge can order the sale of community assets to pay down outstanding debts. Selling community assets is sometimes the best option for the person responsible for the debt, as any money from an asset sale can first be paid to the credit card company. This ensures that the account holder will not have to hound their ex-spouse to pay their fair share.
- Using Joint Funds – A judge may also order joint funds be used to satisfy an individual debt. A joint financial account can be used to pay an individual credit card, especially if it benefitted the community estate or both spouses.
- Ordering one spouse to pay the other’s debt – During divorce negotiations, one party may agree to pay some or all of the other party’s debt, or they may be ordered by the court to do so. This is typically the case when the debts in question are community owned and when one spouse has a much higher income than the other.Unfortunately, such arrangements are rarely executed smoothly. The credit card company doesn’t care who has been assigned the debt legally, as it does not alter the contract they have with the account holder. If the account holder is the one relying on court-ordered payments from their former spouse, they will still be held liable if those payments are late, or not made, and will have their credit dinged as a result. Often, the debt holder will have to force a return to court to leverage their former spouse into payment, and this will cost money. It is difficult to collect a judgment in Texas, so a judgment against a former spouse might not result in money changing hands.
- Assign the debt to the account holder, along with assets to offset the debt – Sometimes the easiest approach is for the account holder to accept full responsibility for the debt and be awarded assets to mitigate or offset it. This can satisfy both sides, but it usually comes with an involved negotiation to determine which assets and debts should be awarded to each spouse.
Financial insecurity should not force a person to stay in a bad marriage. With the assistance of an experienced divorce attorney, debts can usually be managed.