Divorce, Debt and Credit

Divorce is the antithesis of the American dream. It's sad when two people who promised “Till death do us part” go their separate ways, but this is the final result of about 50 percent of all new marriages in America today.

Unfortunately, marriage has become disposable for many people, like everything else in our society.

There are many reasons for divorce. A few are biblical but most are not. Whatever the case, when divorce is spoken of as an option in a relationship, it is often inevitable.

Divorce always causes destruction, because it tears a family apart.

Aside from the emotional trauma of the divorce, the stress of having to deal with debt that was accumulated during the marriage is probably one factor that makes divorce so devastating.

Biblical responsibilities
There are no biblical provisions for the division of debt responsibilities for divorced families.

Because God does not condone the splitting of a marriage, He gives no instructions on how to divide debt. When a couple marries they are “as one” in the eyes of God. As such, their debt is joint debt, not separate.

So, since the Bible is silent on how to handle debt after divorce, the responsibilities are left to the world to decide, which forces many hurt spouses to be thrown before the mercy of secular laws.

Psalm 37:21 says, “The wicked borrows and does not pay back, but the righteous is gracious and gives.” From this Psalm we understand that if a couple makes a vow to pay back what was borrowed, they must honor that commitment, regardless of circumstances or how long it takes. It really makes no difference whether the commitment was joint or individual.

In the eyes of God, a debt incurred during a marriage is a debt for which both partners are responsible and it must be paid back. Solomon said, “It is better that you should not vow than that you should vow and not pay” (Ecclesiastes 5:5).

If divorce is inevitable
If a couple is recently divorced or is contemplating divorce, they might want to look closely at issues involving credit. There are two types of credit accounts: individual and joint.

Individual account: When a spouse applies for an individual account, only his or her own income, assets, and credit history are considered by the creditor. Whether married or single, this person alone is responsible for paying off the debt on the account.

However, if the couple lives in a community property state—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin—both spouses may be responsible for debts incurred during the marriage, and the individual debts of one spouse will most likely appear on the credit report of the other spouse.

Advantages and disadvantages of an individual account. For spouses who do not work outside the home, who work part-time, or who work in lower-paying jobs, it may be difficult to demonstrate a strong financial picture without the income of the other spouse. However, if he or she is able to open an account in his or her name, nobody else can adversely affect that person's credit record.

Joint account: The income, financial assets, and credit history of both spouses are taken into consideration for a joint account. No matter who handles the household bills, both spouses are responsible for seeing that all 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 and disadvantages of a joint account. A joint application combining the financial resources of two people might present a stronger case to a creditor for granting credit.

Keep in mind that because two people applied together for credit, each spouse is legally responsible to the creditor for the entire debt. This is true for a joint account even if a divorce decree assigns a separate debt obligation to each spouse.

A former spouse can adversely affect another spouse's credit history on jointly-held accounts by running up bills and not paying them.

Existing credit accounts
If a couple is divorced or separated or is contemplating divorce or separation, they need to pay attention to the status of their credit accounts.

If they maintain their joint accounts during this time, it is important that they make regular payments—so their credit record won't suffer. As long as there is an outstanding balance on any joint account, both spouses are liable for it.

If one party has been given the responsibility in a divorce decree to pay the balances on outstanding joint credit card accounts, and he or she does not pay the bill, the creditor can demand payment from the other party, regardless of the divorce decree.

Couples, whether divorced, separated, or contemplating divorce or separation, must try to work with creditors and be willing to make whatever sacrifices are necessary to fulfill their promise to repay.

If the creditors refuse to cooperate and force bankruptcy, that is their decision and not the couples'. However, if a couple borrows money with an agreement to repay, bankruptcy does not negate this agreement scripturally.

So, if bankruptcy is the only alternative, the partners, whether individually or as a couple, need to live on a conservative budget and pay the debts back as their budget allows. In some cases, this may take an entire lifetime.

The simplest and safest route to eliminate joint debt is for the couple to agree to pay off the debt before separation is final. This way, there will be no entanglements as both begin their new lives.

Another option is for the couple to agree for one spouse to be responsible for all debts and for this spouse to get more assets to compensate them. This option allows each party to know exactly what they have when they leave the marriage.

Although on the surface agreeing to share all debts seems to be the simplest option, in reality it can become the most complicated and should be avoided if at all possible.

Reestablishing credit
Couples might want to ask creditors to close any joint accounts or accounts in which the former spouse was an authorized user. Or, preferably, ask the creditor to convert the accounts to individual ones or to the name of the spouse handling that debt.

By law, a creditor cannot close a joint account because of a change in martial status but can do so at the request of either spouse. A creditor, however, does not have to agree to change joint accounts to individual ones.

The creditor can require a person to reapply for credit on an individual basis and then, based on the new application, extend or deny credit. In the case of a mortgage or a home equity loan, a lender will probably demand refinancing to remove a spouse from the obligation.

Conclusion
If divorce or separation is a reality, a couple needs to be open to what God wants to do in both of their lives.

As each will be forced to deal with the stress of outstanding debt and of starting a new life, we encourage each to trust God in all areas of his or her life. Don't limit Him, and He will move heaven and earth on behalf of those who trust Him (see Psalm 118).

by Crown Financial Ministries