NEW YORK (MainStreet) —A couple of years ago, Ryan Miller, a 46-year old medical device salesman, sought the advice of Vickie Adams, a certified financial planner in San Pedro, Calif., before he filed for divorce.
He had married Susan, a 37-year old who was passionate about designer shoes and purses and brought $35,000 worth of credit card debt to the marriage with the promise that she was going to curtail her spending and pay the card down bit by bit. Five years into the marriage, the Greater Los Angeles area couple needed their combined income to qualify for a mortgage.
Susan needed to improve her credit score by reducing her debt, because she was barely able to keep up with the monthly interest payments. Ryan paid off her American Express card, which was supposed to be “the payment to end all payments,” but the couple continued to bicker over money and how it was being spent.
Instead of appreciating being debt free, Susan took that as a cue to renew her previous prolific shopping habit. Since Ryan was able to “track” the chunk of funds he used to specifically pay pre-marital debt, he was awarded his share of the reimbursement.
“In some states, a spouse may be entitled to reimbursement, so keep records,” Adams said. “When you marry someone, you marry their credit score, too. If they have poor credit, be careful to keep separate credit cards in your own name that so your credit will not be impacted.”
Paying off your spouse’s debt, like in the case of Ryan and Susan Miller, could wind up spelling trouble for both of you and even lower both of your credit scores in the process.
If one person in the marriage or relationship has a history of accumulating a large amount of debt and has had difficulty paying it off, taking on their debt is not the solution, said John Heath, directing attorney of Lexington Law, a Salt Lake City, Utah-based credit report repair provider.
Relationships are difficult enough to manage, and he advises against paying for a significant other or spouse’s debt.
“As a general rule, I would advise against it,” he said. “Taking on someone’s debt can open the proverbial door to future regret and resentment and put undue stress on your relationship.”
Avoid co-signing on loans, because you wind up being responsible for the debt. If your partner decides to stop making payments on a mortgage, you are still obligated to make the monthly payments. Refinancing on a mortgage and using the equity in the home to pay off your partner’s debts might sound like a good idea initially.
“In that scenario, you will find that resentment builds toward your partner and puts stress on the relationship contributing to difficulties or the end of that relationship,” Heath said.
If you wind up missing mortgage payments, it will be reported to the credit bureaus and will “adversely affect your credit score,” he said.
Protect your credit score if you want to help by making payments for a spouse. This strategy gives you the option of stopping payments at any time, which may become important if your relationship does not work out or you lose your job.
“Instead of co-signing on the refinance of your partner’s home and contractually obligating yourself to your partner’s lender, you can make payments to the lender,” Heath said.
For some couples, it makes more sense to keep the good credit score of the other spouse. It’s a lot easier if you have one person in the household that has good credit, as opposed to both people in the household with bad credit, said John Lindsey, CEO of Lindsey & Lindsey in Westlake Village, Calif.
“I’m not in favor of one spouse paying off accumulated debt of the other spouse,” he said. “It’s not wise. It can drag two spouses down.”
Working with the creditors to develop a payment plan over a period of time or a settlement amount is a better option.
“It makes a lot more sense to work it out and pay it out over time,” Lindsey said. “They may need to do settlements with various debtors, but that’s better than one spouse paying off the other’s debt.”
Debt is also viewed differently by the courts when you are a cohabitating couple, said Kathleen Connell, a partner with Atlanta-based family law firm Boyd, Collar, Nolen and Tuggle.
“For unmarried couples, unless they are jointly indebted, your partner’s debts are not going to impact your credit score even if the relationship is long-term,” she said.
If the relationship sours and you have paid the debt of your girlfriend, do not expect to be repaid, Connell said.
“It will very likely be treated in the eyes of the courts as a gift,” she said.
The rules are different when the indebted person is married. In that case, the debt could be viewed by courts as joint responsibilities even if it is only in one person’s name.
It’s never a good idea to take out a loan to pay someone else’s debt, because it could affect your credit score if you are not able to make payments on time.
“The only thing the bank cares about it whose name is on the loan,” Connell said.
Communicate your expectations before agreeing to pay someone’s debt, so you can have an “open, honest discussion on what happens after the debt is paid off and [so that] the gesture does not wind up as some sort of bargaining chip to be used later as leverage,” said Bruce McClary, spokesman for the National Foundation for Credit Counseling, a Washington, D.C. non-profit organization.
People who shop excessively or gamble should learn to stand on their own two feet, because it is likely they might not learn the lesson and could repeat the same behavior, he said.
In those cases, you would be doing more damage by helping them out. Consider sending them to a non-profit and get credit counseling so you can address the root cause before it spirals out of control, McClary said.
“Don’t be overly generous and get yourself in a bad financial situation,” he said. “It is great if you can afford it, but if you can’t, then don’t do it. You could wind up in debt yourself.”
Helping someone else with debt should really be considered a business transaction, said Leslie Tayne, a Long Island-based attorney. Both parties should have an agreement in writing, especially if the debt needs to be paid back within a certain time.
“That’s why the issue becomes sticky,” she said. “If you feel uncomfortable from the beginning, imagine if things didn’t go well and your relationship ends. If that person loves you, it is better for the relationship to keep it as a side business transaction.”
--Written by Ellen Chang for MainStreet