It is so important to understand what happens to the liability for credit card debt in divorcing situations.
In a divorce, the extent of a party’s liability for credit card debt depends on:
- whether they live in a common law or community property state.
- whether the debt is for a joint credit card, and who the debt is assigned to in the divorce.
- who the debt is assigned to in the divorce.
Credit Card Liability in Common Law States
The majority of states follow the common law rules when dividing property and debt in a divorce. These are referred to as common law states. In a vommon law state, you are generally liable for all debts in your name. This means that if you took out a credit card in your name or if you cosigned on it, then the creditor can come after you to collect the debt. As a result, after divorce, you can be held liable for all individual or joint credit cards as long as your name is on them. However, in most cases, you are not liable for any credit card debt owed solely by your spouse.
Special Rules for Community Property States
When it comes to property distribution and debt allocation, certain states follow community property laws rather than the common law. In a community property state, most debts incurred by either spouse during the marriage (but not before or after marriage) are considered community debts. Both spouses are held equally liable for community debts even if only one spouse incurred the debt.
This means that, if living in a community property state, one may be on the hook for a credit card even if it is in the other spouse’s name only. However, each state also considers different factors when determining if an obligation is a community debt. Generally, if the credit card was used for something that benefited the marital community, it will be community debt regardless of who incurred the charges. But if one spouse used his or her own credit card to buy something that did not benefit the marriage, there is a greater chance it will not be considered a community debt.
Currently, community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In Alaska, married couples have the option to make their property community property by agreement.
What Happens If the Debt Was Assigned to A Specific Spouse in the Divorce?
The first thing to note is that credit card companies are not bound by the terms of the divorce decree or a family court order assigning the debt to a specific spouse. This is because when the credit card was obtained, either one party or both entered into a contract with the credit card company. A family court judge does not have the power to alter the credit card company’s rights under the contract.
As a result, even if a debt was assigned to one spouse in the divorce, the other spouse will still be liable for it if their name was on the account, were a cosigner, or it was a community debt (although it is less likely that a credit card company will pursue an assigned party based solely on community debt liability if it was the other spouse’s card).
However, if one spouse is ordered to pay a credit card in the divorce but fails to do so, he or she will be in violation of the divorce decree or court order. In that case, the other spouse will usually be entitled to reimbursement or damages from the ex-spouse if the other party ends up having to pay the debt.
What If A Spouse Files for Bankruptcy After Divorce?
If one spouse files for bankruptcy after divorce, his or her liability to the credit card company will be discharged. This means that if both spouses were jointly liable on a credit card, the spouse who did not file bankruptcy is now the only one on the hook.
However, if a debt was assigned to one spouse in the divorce and he or she agreed to (or was ordered to) hold the other harmless for that debt, his or her liability towards that spouse is not discharged in bankruptcy. As a result, if one spouse doesn’t pay the debt and the suffer damages, there may be grounds to sue him or her even if the credit card company can’t.
It is always important to work with an experience mortgage professional who specializes in working with divorcing clients. A Certified Divorce Lending Professional (CDLP) can help answer questions and provide excellent advice. To find a CDLP in your area, please click here.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only, and are subject to market changes. This is not a commitment to lend. Rates change daily - call for current quotations.