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A divorce to-do list can contain dozens of tasks, from hiring a divorce lawyer to moving to finding a therapist. But making time to deal with credit card debt now may save you financial trouble down the road.
The first thing to do when you’re splitting with a spouse is to stop adding to your credit card tab, said Tracy Stewart, a divorce CPA who helps couples “divvy up dollars and cents” before they part ways. But don’t pay off existing debt before each of you has hired a divorce lawyer and received advice on how to deal with the debt, Stewart adds.
In an ideal scenario, a couple getting a collaborative divorce will work with their lawyers and a financial professional to divide the debts in a way that feels fair to both, Stewart said.
But in a worst-case scenario, couples can end up at odds about the debt and ultimately go to court to hash out who has to pay which accounts.
Fighting is common during divorce, and money issues can add fuel to the fire, said Emma Johnson, a divorced single mom who offers personal finance and wealth building advice for single mothers at WealthySingleMommy.com.
“Credit card debt can definitely amp up the contentiousness of a divorce,” she said.
Best ways to divide card debt in divorce
If you and your spouse are heading to Splitsville carrying a load of credit card debt, you should work together to wipe out the debt and make a fresh financial start.
Many factors, including where you live, the type of divorce you get and how well you get along, can affect how debt gets divided. For example, debt may be handled differently in one of the nine “community property states,” including Arizona, California and Texas, where all assets and debts belong to the married couple.
You should also know that cardholder agreements trump divorce decrees, and that a creditor will not excuse you from paying a debt just because a judge ordered your ex to pay that bill.
If you were just an authorized user on your spouse’s card, you’re not responsible for that debt. But if an account that was in your name doesn’t get paid, the creditor may start collection proceedings against you and report the delinquency to the credit bureaus.
Three ways debt may be handled in divorce
1. Pay off the debt together before you split
Do you think divorce may be in the cards and want to pay off your debt before you file? Going this route could make sense if you have plenty of cash on hand, a modest balance and you racked up the debt together. But don’t burn through all the cash in your savings account to pay off a big debt.
Divorce is expensive, and it’s generally a bad idea to pay off debt before you’ve each gotten the advice of a divorce lawyer, Stewart said. That’s because your lawyer may have advice specific to your debts.
For example, one spouse may have charged up thousands of dollars in gifts for someone they’ve been seeing on the side, and the other spouse may be unaware of these purchases. Or, one spouse may have a business card on which they’ve purchased a bunch of equipment for their small business, and perhaps the other spouse shouldn’t have to pay any of that debt.
If you do decide to conquer your debt before you divorce, make a plan to pay off credit card debt the right way. You might want to start by making a spreadsheet with all your cards, including the balance, interest rate and name of the account owner. Once divorce is pending, you may be barred from paying off debt, Stewart said. “There are going to be all kinds of rules,” she said.
2. Work together to divvy up the debt fairly
A couple who gets a collaborative divorce or uses a mediator may be able to work together to divide debts in a way that works for both spouses. There may be solutions that make debt repayment relatively simple, such as using proceeds from the sale of your home to pay off joint debt.
During this process, you may want to discuss whose name is on the account and how the debt was incurred, Stewart said. Any joint accounts need to be closed so no additional debt is accrued.
Generally, it’s best for the person whose name is on a credit card account to be responsible for paying off that account going forward, she said. Finances can be tweaked to make that fair, she says.
For example, one spouse may have $2,000 more on their card, so they get the car that’s worth $2,000 more, she says. Authorized users generally get removed and can apply for their own cards if they need to do so.
“There’s a lot of planning about how to pay off credit cards and making sure one spouse doesn’t get stuck without a card,” Stewart said.
3. Let the courts decide who owes which debts
In a traditional divorce, if you do not live in a community property state, and if there are credit card and other debts left to contend with, the courts may divide up the debts “equitably.”
That does not necessarily mean “fair” in the eyes of the couple, but it takes into account various factors, said Todd Spodek, a divorce lawyer in New York, which is an “equitable distribution state.”
One factor that would be considered is who ran up the debt.
“For example, if one spouse went on a shopping spree for just their benefit, it would be unfair for the other spouse to pay for it,” Spodek said.
The court may also take into consideration the couple’s spending patterns over the years and whether the other spouse consented, either directly or indirectly, to a purchase, Spodek said. However, if a couple went on a beach vacation together to try to save their marriage, that’s a different story. That debt would be “clearly marital rather than separate,” he said.
Steps to take to protect your credit from nonpayment
Remember that in the eyes of your creditors, a divorce decree doesn’t excuse you from paying a debt you agreed to pay. This means you need to protect yourself going forward.
If you haven’t done so already, remove your soon-to-be-ex as an authorized user from all your cards, and remove yourself as an authorized user from theirs. Cancel any shared or joint cards. To do so, simply call the issuer to make your request. “Separate things as much as possible,” Johnson said.
If there’s an account in your name that your ex is responsible for paying, check that the account is being paid as agreed. If your ex isn’t paying, then your choices are limited to either assuming the debt yourself or taking your ex back to court to force repayment.
If you’re having trouble paying the debts for which you’re responsible, you may want to consider opening a new 0% balance transfer card to lower your bill by avoiding interest during the introductory period. Another option is to apply for a debt consolidation loan. And if you’re still struggling to pay your debt, you may want to consider credit counseling.
Protect your credit going forward
Check your credit history and credit score frequently during the divorce and in the months and years afterward, Johnson recommends. It’s not unheard of where a former spouse will open fraudulent accounts using your personal info. You can check your credit reports for free yearly with each major credit bureau at AnnualCreditReport.com.
If necessary, try to trim your lifestyle for a while to avoid racking up debt as you transition from being married to a new single life. Make sure to pay your bills on time to keep or build good credit for your future.
“Everything is expensive in a divorce,” Johnson said, citing the costs of attorneys, therapists and moving. “This is a time when you need to buckle down and be fiscally prudent.”