When you’re going through a divorce, protecting your credit is probably one of the last things on your mind. However, as the following question from one of our readers illustrates, it’s definitely something that couples should consider during divorce negotiations:
I am a co-signer whose borrower (ex-wife) has left a $17,000 loan on me and has totally ignored even giving them her address. It is a private loan through Chase and the interest rate is 9% or more. I have been paying. The IRS will not let me deduct the amount I pay. Is there anything I can do? How do I make the borrower accountable?
Unfortunately, as a co-signer, you’re both on the hook. There’s really no way out of it unless your ex-wife agrees to refinance the loan entirely in her name. It’s a catch-22, and one of the primary dangers of co-signing. It’s also the primary reason why divorce often ends up trashing both spouses’ credit reports.
At this point, if you stop paying, and your ex-wife refuses to make the payment, you’ll both suffer the damage to your credit reports and scores. In an ideal situation, you’d be able to negotiate with her so that she contributes something toward the debt, but as far as making her accountable — she already is. It’s just that you’re saving her credit, as well as your own, by making the payments for both of you.
UPDATE: As far as claiming the interest as a deduction on your taxes goes, the IRS doesn’t allow interest deductions on personal loans — only interest on qualifying student loans and mortgage secured loans.
Divorces by nature are rarely ever pleasant, but in an ideal situation, both parties would evaluate their joint debts and address any co-signed or jointly held accounts as part of the divorce proceedings. The best way to handle these types of accounts would be to close them and re-establish individual accounts in one or the other party’s names. This isn’t always an option and for this to happen, both parties have to be open to communicating and divvying up the debts, which rarely happens unless a divorce is amicable.
For one, both parties have to be open to communicating and divvying up all joint or co-signed debts. Secondly, with larger debts — like joint mortgages, for example, refinancing may not be an option financially. In which case, financial responsibility is left to whoever the judge decrees as the responsible party.
The big misconception with divorce decrees lead many couples to assume that whatever the judge says is legally binding, essentially releasing one or the other party from legal liability on a particular debt — it doesn’t. As far as the lender is concerned, if both parties are on the loan, both parties are still legally liable for the loan — regardless of what the judge outlines in the divorce decree. In which case, if the decreed party misses a payment, pays late, or defaults on the debt — both parties’ credit will suffer.