Joint Debt And Debt Settlement: What Happens When Both Names Are On The Account

Joint debt, accounts where two people are both named account holders, creates a specific set of questions when one or both of those people are in a debt settlement program. This article is written for enrolled clients who have joint accounts in their program, for P3 clients evaluating how joint debt interacts with the settlement process, and for anyone dealing with divorce debt and wondering how the settlement program applies.

Century Support Services does not provide legal advice. For questions about how divorce decrees, property agreements, or state law affect your specific joint debt situation, consult a licensed attorney.

Key Takeaways

• Joint debt, accounts where both parties are named account holders, means both people are jointly and severally liable for the full balance under most joint account agreements. A creditor can pursue either party for the complete amount regardless of any private agreement between the two parties, subject to the terms of the original account agreement and applicable law. 
• Divorce debt, joint accounts that a divorce decree assigns to one spouse, is still enforceable by creditors against both original account holders. The divorce decree creates obligations between the spouses; it does not change the creditor’s rights.
• If a joint account is settled through the program, the settled notation appears on both account holders’ credit files. Settlement of a joint account will adversely affect both parties’ creditworthiness, though the specific credit reporting effects may vary by bureau, account, and individual credit file. 
• The credit impact of joint account settlement applies equally to both account holders regardless of who enrolled in the program or whose deposits funded the settlement.
• Century does not provide legal advice. Questions about divorce debt, community property, or state-specific joint liability should be directed to a licensed attorney.

Joint Debt Versus Authorized User: A Critical Distinction

Joint debt and authorized user status are fundamentally different, and the distinction matters for both liability and credit impact.

A joint account holder is equally responsible for the full balance, jointly and severally liable with the other account holder. Either party can be pursued for the complete amount. Both parties’ credit files are affected by the account’s payment history.

An authorized user is permitted to use the account but carries no legal liability for the balance. The primary account holder is responsible. An authorized user’s credit file may or may not reflect the account’s history depending on how the card issuer reports.

If you have a joint account, not an authorized user arrangement, both account holders are fully liable. Divorce debt discussions often involve confusion between these two categories. Verify the account type before drawing conclusions about liability.

What Joint And Several Liability Means

Joint and several liability is the legal structure that governs most joint credit accounts. It means each account holder is independently responsible for the full balance, not their share of it, the full amount.

In practice, if a joint credit card has a $15,000 balance and one account holder cannot pay, the creditor can pursue the other account holder for the entire $15,000. It does not matter that both names are on the account, and the creditor could theoretically collect half from each. The creditor can choose to pursue either party for the full amount.

This structure is generally unchanged by divorce agreements, separation, or any private arrangement between the two account holders, under most account agreements and applicable state law. Century does not provide legal advice; consult a licensed attorney for guidance specific to your state and account type. A divorce decree that assigns responsibility for a joint account to one spouse is an agreement between the spouses, not with the creditor. Under most joint account agreements, the creditor retains the right to pursue both original account holders regardless of what the divorce decree says. Century does not provide legal advice; how this applies to your specific account and state may differ.

How Joint Accounts Work In The Settlement Program

The table below maps the most common joint account situations enrolled clients face and what the settlement process means for each. 

 The most important row in this table is the debt after divorce row. A divorce decree is one of the most common sources of confusion about joint debt liability. The decree creates obligations between the former spouses; the party assigned the debt is obligated to the other. But it does not bind the creditor, who retains the right to pursue both original account holders under the original account agreement.

Divorce Debt And Settlement: What The Court Order Does And Does Not Do

Debt after divorce and joint accounts that a divorce agreement assigns to one party are areas where legal complexity is highest, and the gap between what clients expect and what is legally true is widest.

What The Divorce Decree Does

The divorce decree or marital settlement agreement creates an obligation between the former spouses. The party assigned the debt is generally required to pay it and indemnify the other party against collection by the creditor, though enforcement and remedies vary by state and the specific terms of the decree. If the assigned party fails to pay, the other party has legal recourse against them through enforcement of the divorce decree.

What The Divorce Decree Does Not Do

The divorce decree does not modify the original account agreement with the creditor. The creditor was not a party to the divorce proceeding and is not bound by the terms of the divorce agreement. If the party assigned the debt after divorce fails to pay it, the creditor may pursue the non-assigned former spouse under the original joint account terms.

What This Means For Settlement

If divorce debt is enrolled in the SmartTrack™ program and settled, the settlement resolves the creditor’s claim against both original account holders. However, the tax consequences (Form 1099-C) and credit impact apply to both account holders regardless of the divorce assignment. Century does not provide legal advice. For guidance on the specific intersection of divorce decrees and creditor rights in your state, consult a licensed attorney.

How Settlement Affects Both Account Holders’ Credit

If a joint account is settled, whether by a single enrolled account holder or through joint enrollment, the credit impact applies to both.

•     Delinquency marks (30-day, 60-day, 90-day late payments) appear on both account holders’ credit files for the period the account is delinquent.
•     The settled notation, ‘settled for less than the full balance’, appears on both account holders’ credit files after the settlement is completed.
•     Enrollment in the settlement program adversely affects the creditworthiness of both account holders for the joint account.
•     The seven-year aging clock for all marks starts from the date of first delinquency on the account, the same date for both account holders.

Century does not provide credit repair services and makes no representations about specific credit score outcomes for either account holder. The non-enrolled account holder should be aware of the credit impact that applies to their file as a result of the joint account’s settlement.

Joint Debt Questions Deserve Accurate Answers, And Sometimes An Attorney

Joint debt and divorce debt create some of the most complex questions in a debt settlement program because they sit at the intersection of creditor rights, marital agreements, and state law. Century can answer questions about how enrolled joint accounts are managed in the program. An attorney can answer legal questions about liability, enforcement of a divorce decree, and state-specific community property rules.

FAQ

What is divorce debt in the context of debt settlement?

Divorce debt refers to joint accounts that a divorce decree or marital settlement agreement assigns to one former spouse for payment. In the context of debt settlement, the critical issue is that the divorce decree creates obligations between the former spouses; it does not change what the creditor can do. The creditor retains the right to pursue both original joint account holders regardless of the divorce assignment.

If my divorce decree assigns the debt to my ex, can the creditor still come after me?

Yes. The creditor was not a party to your divorce agreement and is not bound by it. Under most original joint account agreements, both account holders remain jointly and severally liable. However, how creditors apply these rights varies by creditor and state law. The divorce decree creates a right for you to seek indemnification from your ex-spouse if the creditor collects from you, but it does not stop the creditor from pursuing you. Century does not provide legal advice; consult a licensed attorney for guidance specific to your state.

Does settling a joint account affect my ex-spouse’s credit?

Yes. Delinquency marks and the settled notation from a joint account appear on both account holders’ credit files, regardless of who enrolled in the settlement program or whose deposits funded the settlement. Enrollment in the program adversely affects both parties’ creditworthiness for the joint account.

Can both account holders enroll in the program for a joint account?

Yes. Both parties to a joint account can be enrolled in the SmartTrack™ program. Joint accounts can be included in the program regardless of whether one or both account holders enroll. Contact Century to discuss the specific joint account situation.

What about divorce debt and Form 1099-C?

When $600 or more is forgiven through settlement of a joint account, the creditor may issue Form 1099-C to both account holders, though actual issuing practices vary by creditor. The tax consequences depend on each individual’s specific financial circumstances at the time of the settlement, including insolvency position. Century does not provide tax advice; consult a qualified tax professional about Form 982, the insolvency exclusion, and how these may apply to your specific situation. 

Resources

Cornell Law LII: Joint and Several Liability: https://www.law.cornell.edu/wex/joint_and_several_liability

CFPB: Marriage, Divorce, and Your Credit: https://www.consumerfinance.gov/ask-cfpb/what-should-i-know-about-credit-and-divorce-en-1376/

IRS: About Form 1099-C , Cancellation of Debt: https://www.irs.gov/forms-pubs/about-form-1099-c