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When divorce, credit and debt collide

On Behalf of | Feb 21, 2024 | Divorce

In New Jersey, the division of debt during a divorce is a critical issue that can result in long-term effects on both parties’ financial health and credit scores. New Jersey follows the principle of equitable distribution, meaning that debts accrued during the marriage are equitably divided between the spouses in the event of a litigated process. However, they are not necessarily divided equally.

Understanding how debts are divided and the potential impacts on personal credit is essential for anyone navigating through a divorce in this state.

Marital or separate debts

The division of debt in New Jersey starts with identifying which debts are considered marital and which are separate. Generally, marital debt includes any loans or credit incurred by either spouse from the date of marriage to the date of separation. Separate debts, on the other hand, are those that were acquired before the marriage or after separation.

The distinction between these two types of debts is crucial because it determines what each spouse will be responsible for after the divorce. Courts will also consider factors such as the reason for the debt, each spouse’s ability to pay and how assets are distributed when deciding how to divide marital debts.

Impact on credit scores

A divorce decree doesn’t alter the agreements made with creditors. If a person’s name is on a joint account or loan, they remain liable for the debt, regardless of what the divorce settlement states. If an ex-spouse is responsible for a debt post-divorce but fails to make payments, it can negatively impact the other party’s credit score. Late payments, defaults and collections related to jointly held accounts will appear on both individuals’ credit reports, potentially lowering credit scores and affecting the ability to obtain new credit.

Credit protection

Close joint accounts or transfer them to individual accounts to prevent additional charges and ensure each party takes responsibility for their debts moving forward. If an ex-spouse isn’t adhering to the agreed-upon debt payments, it may be necessary to take legal action to enforce the divorce decree to protect the other party’s credit history.

Working out a suitable property division settlement that includes all applicable debts is critical. Sometimes, selling joint property to pay off joint debts is a good idea. Working with a legal advisor who can assist with this property division process can help to better ensure that one’s rights and interests are properly accounted for.