It is one thing to get yourself into debt—we all make mistakes—but quite another to find yourself in debt because you shared a credit responsibility with someone else. The most frequent case of sharing debt occurs when married couples divorce. Every credit card and loan in both their names becomes the responsibility of two separate entities rather than one single unit. Sharing debt can be a recipe for disaster if you don’t tackle the situation immediately.
Let’s say, for example, that you and your spouse decide to purchase a car together. You set up a $20,000 loan over the next five years and you start making regular payments immediately. Then disaster strikes and you decide to separate, splitting the finances right down the middle. But if your spouse isn’t good at managing money, that car loan could turn into a costly mistake.
The same goes for a situation in which you try to help out a friend. Maybe he has a poor credit rating or perhaps you want to go in on a purchase together. Whatever the case, sharing debt even with a friend can be dangerous. If you get into an argument or if one person defaults on the loan, the other is responsible for picking up the slack.
Whether you’re married or unmarried, creditors don’t care how they collect your debt as long as you pay up. If your spouse still drives the car you both purchased together, the creditors will still come after you if he or she stops making payments, and your credit rating will take an equally negative hit. Sharing debt puts everyone in a difficult position and often creates animosity between people who otherwise care for each other.
It is also possible for debts to become shared even without intentional co-signing on loans or lines of credit. If an ex-spouse applies for a personal loan, for example, that debt could become mingled with your own, especially if you share a last name and have applied jointly for credit in the past. The same can happen between parents and children or even between siblings.
If you are worried about sharing debt and are afraid that someone else’s credit practices will harm your financial situation, it’s best to get on it right away. First, order a copy of your credit report and examine it for incorrect information. For example, your spouse’s previous address might have mistakenly found its way onto your own credit report, even if you never lived there. Correct any of these mistakes by contacting the credit bureau.
In some cases of sharing debt, it might be best for you to transfer the amount owed to your own account without the other person’s name. When you pay off the debt, it will reflect positively on your own credit score and you can collect the other person’s share by other means. This strategy only works, however, if there is some evidence that you share the debt. Otherwise, your claim won’t hold up in court proceedings.
If you are thinking about sharing debt with someone else, the decision is entirely your own. Even if three hundred people warn you about the dangers of sharing debt, you might go through with it. If this is the case, you should always have a written agreement stipulating which part of the debt is yours, and which part belongs to the other person. The agreement you sign with the creditor isn’t sufficient because it doesn’t divide the responsibility between the two of you.
Furthermore, you must keep tabs on the payment of the debt regardless of how much you trust the other person. For example, if you’ve purchased a house with a friend, you’ll want to make sure each mortgage payment is made on time, even if your friend is paying the bill from his account. This will keep you from being caught unaware with a hefty fee and damage to your credit report.
The number one rule of thumb for sharing debt is to avoid co-signing with any creditor if the other person can’t be trusted to make payments. Someone who is frequently unemployed or who overspends each paycheck isn’t a sound partner and you should avoid sharing debt with that person at all costs.