When you get onboard into a marital relationship with someone, it only makes sense to have joint accounts, right? Wrong. As it turns out, there is absolutely no reason for a joint account, especially around revolving credit, and having one can cause you serious problems in the future. In this episode, Merrill Chandler talks about how divorce, death, and disability impact your relationship with your lender. He enumerates every reason why having a joint revolving account with your spouse could potentially ruin your credit profile should things turn out for the worse. Listen to the podcast and learn why it is absolutely time to divest your joint accounts now.
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Quadruple Ds… It’s Not What You’re Thinking
In this episode we’re going to be talking about debt and contracts and how even a judge’s court order doesn’t do what we think it does. We’re going to talk about debt and explore some of the nuances and a ton of insider secrets.
What does debt mean? What are the nuances of debt? How can we get out from underneath debt and how can we not? What makes us liable for debts? We’ve got some great insider secrets and some things that you may never have known or for some of you, things you wish you would have known. Let’s start here. First of all, we’ve talked about it in my bootcamps and the book. Every time I opened my mouth, I’m talking about debt. There are two major kinds of debt, especially borrower debt, consumer debt. One is revolving accounts and one is called installment loans. Revolving debt is where you get a credit limit. You use that limit. You can charge it up and pay it off and then you can make a minimum payment or pay the whole thing off.
What most people don’t know is that if you make a minimum payment on $10,000 worth of debt, it will take you approximately 23 years to retire that debt, depending on the interest rate. Did you know? It’s a factoid. On installment loans, the other type of debt is where you borrow an entire amount and then you make it the same monthly payments. You can prepay it. Some have prepaid penalties, but you could prepay a loan like an auto loan, student loan, even a mortgage you have to, but there are common monthly payments that are the same over a certain period of time called the term. We have installment loans and revolving accounts or revolving credit. Here’s the deal, most people do this, but they don’t know the context in which they’re doing it.
Most people engage a loan by filling out an application and when you fill out the application, they pull your credit. After they pull your credit, they run you through, generally speaking, automatic underwriting software. In 30 seconds or 2 minutes, you’re approved or denied. When you’re approved, there’s a tacit agreement until you take the card. Most of us back in the day used to have to sign for that credit card or that application. These days when you fill out an application, the small print, the fine print of what you’re getting back is the second you activate the card, plus your electronic signature from your application is the contract. Sometimes it’s only one thing that has to be done but by and large, they carry your signature from the application over to the agreement. Notice when you get a new card and you’re approved, they don’t send you a form to sign and send it back. That is where you have a contract.
Contract law supersedes all other forms of agreements including court orders. We have two types of debt and you create a contract with this debt. That contract is for life or until one or the other of you writes a letter or communicate with the other party and terminate the relationship. Unless it’s terminated, it is for life. We’re going to be talking about survivorship, the three Ds, Death, Divorce, and Disability and how they impact this process, this relationship you have with a lender. A lender is anybody who lends you money. Sometimes they’re called credit card issuers. Bank of America is a lender. It’s a depository bank and it’s a credit card issuer. These are roles that it plays. Lenders are what we use to describe our relationship with this contractual relationship with them.Contract law supersedes all other forms of agreement. Click To Tweet
Remember, just to be super clear, if you file an inquiry and activate the card, you have a contract. The problem is, when was the last time that you read the fine print of that particular contract? There are a lot of pages to it. They’ve tried to make it simple, what’s called Truth in Lending laws. I’ve also tried to have forced lenders to make the terms easier to understand. Most personal borrower instruments have the notion that if you can have bullets of benefits or requirements like the due date time-end zone is outlined. They may have bullets about what a balanced transfer interest would be or what purchase interest would be. I had a Chase card, where a cash advance was 26% interest per day.
There were many people complaining about not being able to read all the gobbledygook inside of these agreements, these contracts, the lenders with the Truth in Lending, amended accordingly, have to put the essence of those agreements in bullet form that is easy to understand. In two decades, there hasn’t been a single credit instrument, including a car purchase where I have not read the entire purchase and financing agreement for two reasons. One, I want to know what I’m agreeing to and more importantly, this is my jam. I want to get these things ready to go for you.
The Joint Account Dilemma
Now, you have a contract. You’ve engaged in this contract, not even by authorizing it or by activating it. That is your explicit agreement. The tacit agreement means that it’s in the background when you filled out your application and did your electronic signature. The explicit agreement is when you activate the card that is the intent to use. Why am I putting so much emphasis on this idea of a contract? It’s because contract law supersedes court orders by a judge. Contract law is the most fundamental of all law. If you’re in the first semester of law school, which I didn’t take, but I know the course contents. The first semester is all about contract law because it’s the fundamental law. It’s an agreement between two parties with terms and conditions.
That is the essence of a contract. Here’s what happens, when you sign that you’re going to abide by this cardholder agreement, your contract, a judge cannot pull the rug out from underneath that agreement. Let’s say there are two spouses before in a divorce court seeking a divorce. The judge says to spouse B, “I’m looking at all the balance sheets of the family and spouse B, and you are in charge of paying this credit card.” Spouse B says, “Yes, that’s fair and equitable.” Spouse B is like, “I’ve got to pay it.” Spouse A is saying, “That’s cool. It’s fair and equitable.” Let’s pretend that all of a sudden, spouse B does not pay that credit card payment. I have had innumerable clients come to me after the fact because those who come to me get coached exactly the way I’m coaching you.
People who have come to me and said, “I’ve got 30, 60, 90 days late. I’ve got to charge off on this credit card and I want you to remove it because I have a court order that says my spouse was supposed to pay this.” Like I’m doing to you, this is what I did to them, “I’m sorry that you were not taught the rules of this game but because you have an agreement and spouse A, spouse B are joint on the account, that means you are both individually and severally responsible for repayment.” Individually means they’re not going to charge spouse A. Let’s say there’s a balance of $1,000. Spouse A is responsible for $1,000. Spouse B is responsible for $1,000 but what happens is spouse A and spouse B do not see eye-to-eye and they’re not going to collect the same amount from both.
Each of them, A and B, each owe $1,000. If spouse A pays $500, there’s only $500 balance left on that credit card, but both A and B are responsible for that $1,000. Let’s pay it down to $100. Spouse A pays some of the balance. No matter who paid what, both parties in a joint account are responsible for that balance. That’s what jointly and severally is. That means they’re everybody who is a party to that agreement. These are for joint accounts. This is why I don’t want husbands and wives, spouse A, spouse B, partners on the same revolving account. If we’re doing it right, we opened those up and they last forever. We keep the right tier-one cards open forever. We don’t close them down like we would an auto loan or a mortgage. Those will be refinanced or end at some points. We sell the house and both parties are free of the obligation.
Here’s what happens, we go back to our core scenario. Spouse B is charged by the court. It’s a court order that spouse B pay for that credit card. If spouse B does not, contract law demands that spouse A pay that bill or both of them are going to have a 30, 60, 90-day late and a charge off if they do not rectify the situation. Guess what my coaching is in every one of these situations? You can either be right or you can be happy. Spouses many times, fascinate me. The human nature to say, “No. The court said you have to pay that. I’m not going to pay for it,” and they ruin their credit because they don’t handle it.
Know that this is universal. There’s no getting out of this in a court order. The only court order that is an exception to this is a bankruptcy court order, which terminates the debt or at least Chapter 7 Bankruptcy terminates it. We’re not talking about a scenario. We’re talking about a divorce court that says, “By the way, spouse B is responsible for this debt.” Spouse B says, “Screw spouse A, I’m not going to pay that debt.” Spouse B is going to get bad credit when it’s 30 days late and so is spouse A. It is the worst version of mutually assured destruction that there is.
When is the best time to plant an Oak tree? Twenty years ago. When is the next best time? Now. The first thing we want is for no couples, no partnerships to ever have revolving accounts that are joint ever. There’s no reason for it. If you can both qualify together, you can qualify for each having your own. No matter what, I don’t care if you believe as a spouse, you’re going to be healthy, happy, and terrific and live forever. One hundred percent of married persons believe, but they’re going to be part of the 50% that don’t get divorced. I am not going to weigh in either way, but 50/50 is not good odds. I’m giving this one to you for free. Under no circumstance, I do not know of any circumstances where you should be joined on a revolving account ever.
Getting Rid Of The Join Account
If we didn’t have that education or foresight, if you didn’t have me in your corner before you got the joint account, then the time is now to get rid of that joint account. The way you do it is you call up and say, “We want to each have our own account.” They will run each of your credit to see what each of you can handle. One of you may keep the number and another one would be given a different account and a different number and credit card. The idea is that you should not be on a joint account for all of the reasons that we’ve been discussing. Don’t ever do it, but if you’ve done it, separate, disjoint. Call up your creditor. You probably have a 720 or higher score to ensure success and be sure each of your household income when you are applying.A derogatory account is worse than no account at all. Click To Tweet
Most lenders approve household income. Now, you’re in divorce court and you still have a joint account. You need to make arrangements to disjoint that account as part of your divorce proceedings. You have to be amicable. One person may keep the account, the other may not. If you’re on two or more joint accounts, then divvy them up. Who gets what? Without adult supervision and additional coaching, I’m giving you the broad-strokes but get out from that situation because a derogatory account is worse than no account at all. No revolving account and no credit card is far better than having a derogatory account at least in our purposes in trying to protect you.
In this divorce proceeding, you need to make sure that if spouse B is ordered by the judge that they’re responsible for this joint account, then talk to your divorce attorneys about making conditions of removal and disjointing the account as part of the divorce. Both parties have to stipulate to remove one of you from the thing or get your own accounts at that same lender. That’s one thing you can do. The other is, if you’re not going to stipulate to disjointing the account as part of the divorce, then you need to know that if your spouse is responsible for a debt, you need to be on those emails. You need to be on those notifications so that they don’t pay it, you do. You’re saying, “The court ordered them.” You can be right or you can be happy and I’d rather you be happy. I’d rather you not have derogatory accounts so that you have a reason, an excuse to keep pointing the finger at somebody who you’re leaving for or leaving you for some reason or another. Don’t add more conflict to this situation.
We need to spin it down. We don’t want to spin it up and get it more aggravated. What you need to do is make it a part of the divorce decree that should an assigned party, an ordered party, not do their obligations under the divorce decree that there is a penalty that they have to pay. If you can’t pay the bill, then they have to pay for credit repair services or some stipulate, some penalty for not maintaining their obligation so that you as the injured party can figure out a way to recoup the loss and fix your credit. Do whatever you need to do. If you’re my client and if you’re my student, we’re going to stay as far away from this process as possible. You’ve got to put it as part of the agreement so that each party has the most amount of motivation to continue to pay the payment.
You’ve also got to be human about this like a heartfelt, compassionate human. If there’s a legitimate reason why your former spouse can’t make that bill, then you have to pay it. Make sure you stipulate in the divorce that there is a repayment of whatever interest and fees that you paid as the non-ordered party. That means you’re not responsible to the court to make the payment but you are responsible to the lender to make the payment. You have to put into the divorce proceeding that if you have to pay, the other party has to pay you back with some penalty. That way you keep the motivation up, but you’re not ruining your credit to spite somebody. We always hear the thing, “Cut off your nose to spite your face.”
Why would you ruin your fundability for 5 to 7 years? We did the mortgage episode where if you’re at 820 and you do a 30, 60, 90, it takes you 5 to 7 years to get back to that 820. Why would you do that? You’re already splitting up from your spouse or partner, why not make it as clean a break as possible? This is powerful juju. We talked about divorce. Make sure you seek to be happy and not right because too many people and couples have ruined their profiles for years because they didn’t understand it or they wanted to fight about it. Maybe I’m a Tin Man. I am too dispassionate about this because I have seen the heartbreak that it brings. I see how many people’s lives are ruined. You split up. You can’t get a house because you trash your credit with a 30 or 60, 90-day late because you believed the court instead of knowing what obligations you have and what the contract with a lender requires of you.
That’s not your fault but now you’re reading this. Now, it’s your fault. You’ve got to show up to make sure that you do it right. That’s divorced. Let’s talk about the other two Ds in turn. Let’s talk about death and the unfortunate and my heart goes out to those of you who have lost loved ones, especially the spouses that we lost that we didn’t want to divorce. Rightly so, I want everybody to be happy but there are people out there who are dead set on separating and divorcing somebody. There are others of you who lost someone that you would have never divorced nor do they you in your entire life. We can lose them too. Let’s talk about the rights and the problems with joint accounts when it comes to death. We’ll throw in disability here as well.
When a partner or someone who we are either a co-signer or a joint owner of an account, if our spouse passes, you are fully and absolutely obligated unless you bought death insurance. Some auto loans do it. Mortgages always do it, pay off in case of death, but you’re fully obligated on the mortgage, the auto, or the revolving account balance if you were a joint account. You lose your spouse and then within the next 30 days, all of your bills come due. We’re adding financial trauma to a horrible situation. If you have individual accounts, you have yours and she or he has his, you are not obligated upon the point of death, your life will be threatened within an inch of your life. If you have individual accounts and your partner or spouse passes, you are not liable for that partner or spouse balance.
I do recommend life insurance for mortgages, not so much on an auto loan if you have the resources. Let’s say you’re a full-time mom or stay-at-home dad and your spouse is the breadwinner, I would make sure for the big-ticket items that you have insurance on those particular things. Some people call it a rip-off. I’ve seen way too many people pay way too high of a price. One 30-day late, much less 2 or 3 of them or 60, 90s in charge offs will make you unfundable for 5 to 7 years. That’s not okay especially if because of death or disability, you’re now the sole breadwinner for the family.
The whole point of this is that you need to have separate revolving accounts both personal and business where possible mortgages. I always tell spouses if they can afford it to put a mortgage on one and then the next mortgage is on the other and split them. You can share them if you need to and you don’t have the resources to both have mortgages or you’re not in real estate investing like some of my clients where each of them is on multiple properties. My point is that you do not want to be obligated to pay something if your partner has passed the same as with disability. If your partner was a breadwinner and all disabilities don’t qualify for disability benefits from the Social Security Administration, you can be unemployable and not qualify for disability.
By separating these out, you at least cut in half your most dangerous debt load and you will end up with half of it instead of all of it. People ask me, “My spouse dies and I don’t have to pay their debt because we have individual accounts. How was that a benefit? What else is there that I can benefit from that?” Here’s one of the things that are subtle but I run into it with clients. When you have a death or disability, if you are paying this bill, you’re paying them on auto payment with a credit card and they pass, I tend to recommend that the more outgoing, the person who’s more out of the house, who has a more challenging or is more at risk, that you charge their account up before you charge the ones at home.Do not have joint accounts. Divest those joint accounts as soon as you possibly can. Click To Tweet
The person, the stay-at-home mom or dad, I call it a nest egg borrower profile. Whereas, there is the risk-taker borrower profile. In the best scenarios, if you carry balances or carry loans on the more aggressive, the more risk-taking partner in your partnership, 1 of 2 benefits comes as a result. If that person passes, then the more aggressively used credit also passes and the stay-at-home mom or dad is not required for repayment. You have built this nest egg credit profile to launch again. Let’s say there are no three Ds, Death, Divorce, or Disability. If you take risks with one profile and protect the other one, then you can relaunch that nest egg profile if the worst-case scenario happens. For partners or married persons, that’s part of our soft landing. We designate one of the partners as the soft landing profile to reboot should anything happen to the more risk-taking profile.
I’m not an attorney, but I have probably been to more divorce proceedings or had as clients, individuals who brought me their paperwork, showing the math. I’ve been in the nth degree of these situations and I’ve approved language so that somebody who is my client could take it to their divorce attorney and include that language into the court proceedings. The bottom line here is that you can only lift someone from a height where you’re already standing. You cannot reboot your borrower capacity and your family finances. You cannot start over unless you are strong. Otherwise, you’re going to be sitting at the effect and the wheels are going to be coming off of your finances and you are no help to yourself, your children, family or loved ones. Revolving accounts, being joint on them is bad. I even reduced it in our fundability matrix and when we’re valuing accounts. I reduced it to the full 20% because that’s how harmful it can be towards your profile. Do not have joint accounts. Divest those joint accounts as soon as you possibly can.
If you’re in the mid-600s together as a couple, then do what it takes to build your profiles together so that you can then divest them because they will not let someone who is not fundable out of that agreement. They want as many parties responsible to pay that back as possible. If you’re in the mid-600s or high 600s, then do what it takes to make a fundable profile so you can separate your profiles. I want you to completely separate. Only engage mortgages or auto loans if you need both of your income to substantiate being able to afford that particular purchase.
If you can get away with it, one of you on one house, one of you on the other or alternate. Do not both of you be on any credit instruments and if you have to, it’s okay on installments. There is no reason whatsoever for you to be joint on a revolving account. I’ve been talking about the three Ds for many years now and it’s a thing. Please, take care of yourself and your loved ones. Play this funding game to win and keep bingeing because you continue to learn new rules and how to master this game and play it better and better. Thank you for reading and I hope you have a spectacular day. Disjoin your revolving accounts. Bye for now.
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