FTC FACTSfor Consumers

CREDIT

I

Mary and Bill recently divorced. Their divorce decree stated that Bill would pay

the balances on their three joint credit card accounts. Months later, after Bill

neglected to pay off these accounts, all three creditors contacted Mary for

payment. She referred them to the divorce decree, insisting that she was not

responsible for the accounts. The creditors correctly stated that they were not

parties to the decree and that Mary was still legally responsible for paying off

the couple’s joint accounts. Mary later found out that the late payments appeared on her credit report.

f you've recently been through a divorce — or are contemplating

one — you may want to look closely at issues involving credit.

Understanding the different kinds of credit accounts opened

during a marriage may help illuminate the potential benefits —

and pitfalls — of each.

There are two types of credit accounts: individual and joint. You can permit

authorized persons to use the account with either. When you apply for credit —

whether a charge card or a mortgage loan — you'll be asked to select one type.

Individual or Joint Account

Individual Account: Your income, assets, and credit history are considered by

the creditor. Whether you are married or single, you alone are responsible for

paying off the debt. The account will appear on your credit report, and may

appear on the credit report of any "authorized" user. However, if you live in a

community property state (Arizona, California, Idaho, Louisiana, Nevada, New

Mexico, Texas, Washington, or Wisconsin), you and your spouse may be

responsible for debts incurred during the marriage, and the individual debts of

one spouse may appear on the credit report of the other.

Advantages/Disadvantages: If you're not employed outside the home, work

part-time, or have a low-paying job, it may be difficult to demonstrate a strong

financial picture without your spouse's income. But if you open an account in

your name and are responsible, no one can negatively affect your credit record.

Credit

Divorce

and

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Joint Account: Your income, financial assets,

and credit history — and your spouse's — are

considerations for a joint account. No matter

who handles the household bills, you and your

spouse are responsible for seeing that debts are

paid. A creditor who reports the credit history

of a joint account to credit bureaus must report

it in both names (if the account was opened

after June 1, 1977).

Advantages/Disadvantages: An application

combining the financial resources of two people

may present a stronger case to a creditor who is

granting a loan or credit card. But because two

people applied together for the credit, each is

responsible for the debt. This is true even if a

divorce decree assigns separate debt obligations

to each spouse. Former spouses who run up

bills and don't pay them can hurt their expartner's credit histories on jointly-held accounts.

Account "Users"

If you open an individual account, you may

authorize another person to use it. If you name

your spouse as the authorized user, a creditor

who reports the credit history to a credit bureau

must report it in your spouse's name as well as

in your's (if the account was opened after June

1, 1977). A creditor also may report the credit

history in the name of any other authorized

user.

Advantages/Disadvantages: User accounts

often are opened for convenience. They benefit

people who might not qualify for credit on their

own, such as students or homemakers. While

these people may use the account, you — not

they — are contractually liable for paying the

debt.

If You Divorce

If you're considering divorce or separation, pay

special attention to the status of your credit

accounts. If you maintain joint accounts during

this time, it's important to make regular payments so your credit record won’t suffer. As

long as there's an outstanding balance on a

joint account, you and your spouse are responsible for it.

If you divorce, you may want to close joint

accounts or accounts in which your former

spouse was an authorized user. Or ask the

creditor to convert these accounts to individual

accounts.

By law, a creditor cannot close a joint account

because of a change in marital status, but can

do so at the request of either spouse. A creditor, however, does not have to change joint

accounts to individual accounts. The creditor

can require you to reapply for credit on an

individual basis and then, based on your new

application, extend or deny you credit. In the

case of a mortgage or home equity loan, a

lender is likely to require refinancing to remove

a spouse from the obligation.

For More Information

The FTC works for the consumer to prevent

fraudulent, deceptive and unfair business

practices in the marketplace and to provide

information to help consumers spot, stop and

avoid them. To file a complaint or to get free

information on consumer issues, visit

www.ftc.gov or call toll-free, 1-877-FTCHELP (1-877-382-4357); TTY: 1-866-653-

4261. The FTC enters Internet, telemarketing,

identity theft and other fraud-related complaints

into Consumer Sentinel, a secure, online

database available to hundreds of civil and

criminal law enforcement agencies in the U.S.

and abroad.

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January 1998