Depending on the validity of their information, most sources indicate about 45% of marriages fail and end up in divorce. What this means is every single one of those couples who are divorcing is eventually forced to deal with the credit and debt component of their separation. Dealing with joint debts in the middle of a divorce isn’t easy. But, if you get divorced then why is your ex-spouse credit still on your credit reports? Shouldn’t it be removed?
When you applied for credit you may have applied with your soon-to-be ex-spouse. This is commonly referred to as “joint” credit. This is accomplished by both of you signing or co-signing the credit application or promissory note. What this means, in practical terms, is both of you are equally liable for the debt, regardless of whose name is listed first on the application.
The only way to eliminate one of the two co-obligors on a loan or credit card is for the lender to voluntarily release one of you from your contractual obligation to repay the debt. Good luck with that. Have you ever heard of a lender voluntarily releasing one of the liable parties from their obligation to pay them back? Me neither.
So, joint debt is permanent. Sure, you can pay off credit cards and close them. You can refinance loans into one person’s name, thus eliminating the joint liability. And, you can sell homes and cars, which eliminates the debt altogether as long as the sale proceeds are sufficient to satisfy the debt in full at closing. But, those are very different solutions to the problem of joint liabilities.
Over my 31+ years in the credit industry, I can’t tell you how many times I’ve had a discussion with a consumer who argued that their divorce settlement and decree released them from liability for their part in joint credit. Their position, which makes perfect sense, is if their divorce settlement assigned responsibility for payment to one or the other spouse, the lenders should honor that arrangement. Unfortunately, lenders are not a party to those settlement agreements and are not bound by your arrangement with your ex-spouse, which means they are not required to honor them.
What this means is even though you may have a piece of paper that indicates your ex-spouse is supposed to make payments on your home loan, auto loan, or other joint credit obligations, that doesn’t mean the lenders are required to remove your name as a co-obligor. In many divorce settlements, one spouse agrees to eventually refinance a loan or loans into solely their name, thus eliminating any other co-obligors. Of course, that can take years.
Unfortunately, your options are limited. They’re limited not only based on where you are in the divorce process but also if you and your spouse are willing to work together to solve the debt issues before they become debt problems.
The first thing you should do is go open one or two credit cards in your name. That way you’ll have a way to pay for things already in hand just in case your credit reports become polluted with late payments thanks to a non-paying ex-spouse.
The next thing you should do is close all of your joint credit cards. This is the only time you’ll ever see this advice coming from me. Normally it’s a bad idea to close credit cards because you lose the value of the unused credit limit in your credit scores. But, closing them is the lesser of two evils. This prevents a vindictive ex-spouse from getting you into debt.
Sell anything that is securing a joint loan. Hopefully, this only means your home. This will eliminate any joint liability for a mortgage loan. And, it will help your debt-to-income ratio immensely because your mortgage is likely your largest monthly obligation.
The alternative to selling things is to refinance loans. This will eliminate one of the two obligors and you or your spouse will end up with a mortgage or car loan in one name, instead of two.
Yes, I know homes are expensive and interest rates are high right now. None of these are easy or clean choices. You have to pick the best from some bad options. But, the alternative is to do nothing and possibly end up with defaults and late payments on your credit reports for the next 7 years.
If you went through or are going through a divorce, sorry…or congratulations, whichever applies to you. And while you’re likely focused on who is going to get the kids, visitation rights, and how the money is going to be divided, don’t forget about the joint debt. Otherwise, you’ll learn the hard way that divorcing your spouse is much easier than divorcing your lenders.