This article was co-written with attorney Cheryl Stein.
As cash fades into the background, credit cards are becoming a dominant currency. The credit card industry is competitive. Credit card companies often offer incentives to use their credit cards, hoping that consumers will take the bait. Under federal law, for the protection of consumers, credit card companies must follow certain protocols, which define the terms under which credit is issued to individuals. In turn, the form in which credit is issued to spouses can impact their responsibilities at divorce.
What is the significance of the Equal Credit Opportunity Act for people considering marriage or divorce?
The Equal Credit Opportunity Act, codified at 15 U.S.C. § 1691 et seq. (the “ECOA”), enacted in 1974, protects consumers who deal with companies that regularly extend credit, including banks, small loan and finance companies, retail and department stores, credit card companies, and credit unions.[i] Parties who participate in the decision to grant credit and arrange financing must follow this law.
Before the ECOA, a woman often faced roadblocks when she tried to establish credit in her own name.[ii] Under the ECOA, a creditor is prohibited from discriminating against an applicant on the basis of gender or marital status (among other things). In New York and other equitable distribution states, creditors may not inquire about marital status if an applicant is applying for separate, unsecured credit. In community property states, creditors may ask about marital status even if an applicant is applying for separate, unsecured credit. Across the board, regardless of whether a couple lives in a community property or equitable distribution state, creditors may make such inquiries if the credit is secured by property – such as a home mortgage – or if spouses are seeking joint credit. Whether the credit is separate or joint, secured or unsecured, creditors may not discriminate on the basis of gender or marital status when deciding to extend credit. In addition, the ECOA requires credit card issuers to provide a nondiscriminatory reason for denying credit and credit increases, singling out a particular creditor for negative changes in the terms of his credit, or refusing to extend credit under the same or approximately the same terms as were put forth when the application was made. The ECOA further prohibits creditors from disregarding spousal maintenance and child support as sources of income, and thus provides a safeguard for divorced women seeking credit.
Other regulations further circumscribed what the creditor could inquire about when vetting applicants. One such regulation concerned inquiries about household income. The result: a consumer was able to rely on the income of his or her spouse when applying for individual credit. This regulation paved the way for married women, whether working outside the home or not, to obtain credit in their own name.[iii]
Together with these regulations, the ECOA changed the landscape of credit card usage in the United States. In addition to leveling the playing field between marketer and consumer, the ECOA made some strides in leveling the playing field between men and women. Following the passage of the ECOA, it was possible for single women to obtain their own credit cards and to buy condominiums and co-ops on their own.[iv]
What is the significance of the Credit Card Accountability Responsibility and Disclosure Act of 2009?
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”) limits the breadth of the ECOA. A provision of the CARD Act requires every credit card issuer to consider the consumer’s ability to make required payments under the terms of the account. The CARD Act initially prohibited credit card issuers from considering household income. This prohibition led to concerns that the CARD Act had important negative implications for non-working, divorced, or widowed women, as such women might have no access to their own credit, and thus might lack a credit history which could demonstrate creditworthiness.[v]
In 2013, the Consumer Financial Protection Bureau “updated existing regulations to make it easier for spouses or partners who do not work outside the home to qualify for credit cards...[by allowing] credit card issuers to consider income that a stay-at-home applicant, who is 21 or older, shares with a spouse or partner when evaluating the applicant for a new account or increased credit limit.”[vi]
What are the implications of divorce for credit card debt?
Liability for credit card debt at divorce depends on whether the divorce is filed in an equitable distribution or community property state, whether the debt is incurred on a jointly held credit card, and to whom the separation agreement assigns the debt.
In equitable distribution states, credit card debt incurred during a marriage is generally the joint responsibility of both parties, as long as both are co-signers on the credit card. (Note that in community property states, both spouses are generally responsible for debt incurred by one partner).[vii]
A spouse may need to take extra steps to protect him or herself when he or she holds debt on jointly held credit cards. Credit card companies are not bound by divorce decrees, so they can pursue either spouse if credit card debt is not paid by the spouse who agreed to do so in a separation agreement.[viii] The contractually bound spouse may fail to pay for many reasons, including bankruptcy. When such failure occurs, credit card companies may legally pursue the other spouse for the debt (plus interest and penalties). Indemnification clauses in a separation agreement can address this potentiality. However, enforcement of the terms of an indemnification clause may require litigation. In some cases, the money spent on litigation may exceed the amount owed to the credit card company. Further, trying to enforce such terms in an agreement can prolong litigation, as well as the hostility and contentiousness which often accompany it.
In New York State, what can a person do to protect himself or herself from credit card debt incurred by his or her spouse?
If a person is concerned about debt his or her spouse incurs, he or she may decline to open joint credit card accounts. If a credit card account is in one spouse’s sole name, even if the other spouse is an additional cardholder, the other spouse is not liable for the debt.
[i] Credit applications – know my rights, MyFico, http://www.myfico.com/crediteducation/rights/creditapplicationrights.aspx (last visited Nov. 11, 2016).
[ii] NFCC Examines History of Women and Credit, National Foundation for Credit Counseling, https://www.nfcc.org/consumer-tools/consumer-tips/nfcc-examines-history-of-women-and-credit, (last visited Nov. 11, 2016).
[iv] Betsy Israel, Bachelor Girl: The Secret History of Single Women in the Twentieth Century 234 (2002).
[v] NFCC Examines History of Women and Credit, National Foundation for Credit Counseling, https://www.nfcc.org/consumer-tools/consumer-tips/nfcc-examines-history-of-women-and-credit, (last visited Nov. 11, 2016).
[vi] The CFPB Amends Card Act Rule to Make it Easier for Stay-at-Home Spouses and Partners to Get Credit Cards, CONSUMER FINANCIAL PROTECTION BUREAU (Apr. 29, 2013), http://www.consumerfinance.gov/about-us/newsroom/the-cfpb-amends-card-act-rule-to-make-it-easier-for-stay-at-home-spouses-and-partners-to-get-credit-cards) (last visited Nov. 11, 2016).
[vii] Amy E. Buttell, Dividing credit card debt in divorce, CreditCards.com, http://www.creditcards.com/credit-card-news/help/dividing-credit-card-debt-divorce-6000.php, (last visited Nov. 11, 2016).
[viii] Divorce Decrees - Protecting Your Credit, Joint Accounts, Financial Obligations, Credit Infocenter (Mar. 19, 2015), http://www.creditinfocenter.com/divorce/divorcedecrees.shtml, (last visited Nov. 11, 2016).