Protecting Our Client's Credit From Divorce and Identity Theft
Amy A. Yu and
Gail M. Towne
Dividing debt in divorce is often easier in theory than in practice especially in
today's age where credit card debt has been extended significantly and where identity theft is an ever growing and devastating concern. We, as lawyers, arbitrators and judges, can apply the law to determine an equitable division, but often times our jobs, at least as advocates for our clients, are not yet finished. Reputation, especially after a divorce, is sometimes one of the most valuable things our clients possess. When our client's credit is damaged, so is his or her reputation, in more ways than most of us realize. We, as advocates for our clients, can take steps to help protect against such damage.
In order to protect our clients adequately, we also need to ensure that our clients can manage the assigned debt and are protected from sabotage, inaction or other consequences resulting from their ex-spouse's or other third parties' behavior. There are many mechanisms available to help protect our clients from the consequence of divorce and identity theft. These methods begin upon retention and continue long after the Judgment of Divorce has been entered. Credit standing and identity theft are serious considerations every step of the way. Attorneys need to ensure that are clients are adequately protected.
The Importance of Credit Standing and Security
Credit rating is very important to us because it affects many facets of our lives. Our credit reports aren't as personal as we may think and can affect areas of our lives we may not realize. Third parties can obtain our credit reports through court orders, for consumer purposes and for investigative reasons.
Our credit status not only affects our ability to do the obvious, such as to buy property, refinance existing debt and obtain loans, but can also affect other areas of our lives. Presently, insurance companies, are looking at our credit reports to assist them in evaluating our risk factors when obtaining automobile and health care insurance. Bad credit ratings can also be reviewed by prospective employers and courts, affecting our ability to obtain employment or custody of our children.
Not only do our credit reports affect various aspects of our lives, but they also affect our lives for various periods of time. Public records, such as civil judgments, Chapter 13 bankruptcy dismissals and discharges, and paid tax liens, will stay on our credit reports for up to seven years.[i] Chapter 7, 11, and 13 bankruptcy filings can stay on our credit reports for up to ten years and unpaid tax liens can stay on indefinitely.
The "Credit Score" and How Credit is Impacted
The credit score is quickly surpassing our IQ scores and cholesterol levelss as one of our most important identifying numbers. The credit score is a fluid three digit number used to signify one's credit rating, ranging from 330-830, 830 being the better score, or less credit risk score. It is used to summarize a consumer's credit history rather than manually reviewing the entire report. Some factors that affect the credit score are the number and severity of late payments, the type, number and age of accounts, total debt or potential debt (available credit), and recent inquiries.
Third parties review and evaluate other factors besides the credit score when weighing credit risk. Additional factors reviewed are income, the amount of a loan sought, and length of time at jobs. Although, it seems like our entire lives on bared in this simple document, we can find some protection in the Equal Credit Opportunity Act [ii]. This act states that we cannot be denied credit for reasons based on race, color, religion, origin, gender, age, marital status, or receipt of public assistance.
Attorneys Must Take Steps to Protect Our Clients Credit Upon Retention
Protecting our client's credit begins as soon as the retainer agreement is signed. Many attorneys instruct their clients at the commencement of a case to begin collecting various documents, including income tax returns, mortgage statements, closing papers, life insurance polices, and bank account statements to name a few. However, the initial documentation should not stop there. Also, at the onset of the case, additional focus should be on three important documents: (1) the credit report; (2) the TRO; and (3) the Status Quo Order.
One document often overlooked is the credit report. Our clients should be instructed to obtain his or her own current credit report from all three credit reporting agencies, Experian, Equifax, and TransUnion. Credit reports are available free of charge in certain circumstances. Individuals can generally get free credit reports whenever they have been turned down for credit or employment or receive a bad credit rating. However, commencing March 2005, any individual can get a free credit report from each of the agencies once every twelve months, unconditionally[iii]. This new legislation also allows a waiver of processing fees that are sometimes charged when applying for mortgages or leases.
Upon receipt of the client's credit report, ultimate scrutiny is a must. The credit report is an extremely useful document in that it contains or should contain all open accounts. Therefore, detection of otherwise unknown activities of the spouse may be identifiable with a review of the report. When reviewing our client's credit report, it is important to pay close attention to the payment history, use of credit and accounts that seem unfamiliar.
Many clients and even some attorneys do not understand the jargon and the ratings contained in the credit report. The first place to start may be the credit score as discussed at length above. For example, a credit score above "700" is usually considered to be good. If the score is lower than expected, potential reasons are usually listed. These reasons are the major red flag that further investigation may need to be done. In reviewing the client's credit report also be sure to double check the following: the personal information, including, addresses, names, employment information; the credit summary which will summarize the good and the bad; public records; credit inquiries; and account history.
It is also imperative to scrutinize the spouse's credit report. Ask for the report via a Request to Produce or other standard discovery vehicles. In obtaining the opposing parties' credit report, care should be taken. While your client may order his/her own credit report, they absolutely cannot obtain another's credit report without written authorization or a court order. To do so could result in criminal and civil liability.[iv] Criminal/civil liability to obtain another's credit report without written authorization or a court order[v] or permissible purposes should be taken very seriously. [vi]
It has become standard practice for most family law attorneys to request an Ex Parte Mutual Restraining Order/Temporary Property Injunction (TRO) when filing the initial divorce pleadings. In fact, this order is almost a necessity in most divorce cases and has become one of the most common ex parte orders obtained so long as it is made mutual. The purpose of the TRO is to prevent parties from dissipating or hiding marital assets and/or incurring additional marital debt. This document should be served on the party when the initial pleadings are served. In many cases, the documents should also be served on all known financial institutions of the parties so as to prevent any foul play.
Another ex parte order that is desirable in some cases is the Ex Parte Status Quo Order. This order is to ensure that the household bills are paid by both (or one) party in the usual course of things. It is beneficial to both parties so they do not become delinquent on their joint bills and incur additional debt.
Sometimes, it is sensible to advise the client to close all joint accounts immediately. Particular situations that come to mind may be where one spouse is missing or has an excessive spending/gambling problem. In such situations, some or all joint accounts may need to be liquidated and closed to prevent the other spouse from racking up credit card bills, liquidating and/or spending marital funds. This will protect your client from exposure to liability of a credit card debt or possible credit damage if the other spouse does not pay. Make sure that if your client is doing the liquidating, the funds are placed in a trust account or used for reasonable, ordinary marital bills.
Early in the divorce proceedings, discovery should be done not only to find all the assets, but also done to best protect the client's credit. It is generally best to do Interrogatories and Requests to Produce at the onset of the case. Don't forget to ask for a copy of the opposing party's credit report. This may be the only chance to obtain it legally. It is important for the client to review the discovery responses thoroughly. Oftentimes, the client will find assets or debts that he or she never knew about.
If the responses to the discovery requests still do not provide enough information, start subpoenaing disclosed financial institutions or other institutions where suspected accounts may exist. Examination of financial statements can sometimes be the most fruitful practice in the discovery process.
After all the discovery is completed and all the debts are found, the attorneys and clients must collaborate on the most practical mechanisms to divide the debt between the parties, not only equitably, but also practically. Depending on the particular circumstances of each case, there are various things to consider before dividing the debt and especially before putting it all in writing.
The threat of one spouse filing bankruptcy is prevalent in more and more divorce cases. The spouse to watch carefully is the spouse that swears he or she will never do such a thing. The status quo order and the credit report come in handy in such a scenario. Has he or she been paying the bills as ordered by the court? Has he or she been paying other bills and debts timely? How is the spouse's credit report? Evidence of a spouse continuously falling behind in the payment of bills is a huge red flag. If that spouse files for bankruptcy after the Judgment of Divorce is entered and the parties were to split a joint debt (or even if the bankrupt spouse was to take the whole debt but the innocent spouse's name remained on the debt) the third party creditor will come after the non-bankrupt spouse for the entire debt. A discussion on ways to protect this spouse is discussed further in the "Drafting" section of this article.
There are some options available to protect the client from the potential threat of bankruptcy on the part of the other spouse. Section 71 of the Internal Revenue Code effectuates the payment of spousal support “in gross”.[vii] Alimony in gross may be awarded either in lump sum or by way of installments of a sum certain over a specific period of time.[viii] Section 71 spousal support can be used in a scenario when there are concerns that one spouse will not pay his/her share of the joint debt because of either bankruptcy, noncompliance or some other reason. In such a case, your client can take on full responsibility for the entire debt and the opposing spouse can be ordered to pay a tax-effected amount of his/her share of the debt to your client. The main advantage of Section 71 spousal support is that the payor spouse cannot discharge the support in bankruptcy so long as it is stated for the purpose of support.[ix] Some other advantages are that the client will have the enforcement mechanisms of the Friend of the Court available to him/her, and he/she will have control of paying the debt to insure that it gets paid timely. The obvious disadvantage is that the spousal support is taxable to the payer and there may be periods when a non-compliant spouse does not pay the support but your client still must bear the expense of the debt. Another disadvantage is that if the language does not state clearly that it is for the purpose of support for the recipient spouse, it will not meet the requirements of Section 71 of the IRC.
Another approach to dividing the debt in divorce cases is to assign half, or whatever amount equity dictates, to each party. Of course, that seems obvious, but take it another step further. In some cases, the parties cannot simply pay off the debt or even half the debt. If the clients could easily do this, they probably would not have the debt in the first place. There are other means to effectuate this division. In cases where the parties have the ability to procure credit on their own, have them do so and pay off his or her share of the old joint debt with the new individual debt, in his or her name alone (or with a third party if necessary). A simple example of this would be that each party opens up a new credit card in his or her sole name and transfers half the debt (or that party's share of the equitable debt whatever amount it may be) from the joint card onto that new card, then be sure to close the joint account. This is as simple as it gets, but each client needs to do his or her homework. He or she must shop around for the best interest rates, whether it be in the form of a home equity line of credit, bank loan (which usually has better interest rates than credit cards) or other lines of credit or credit cards.
In some cases, after a divorce and a split of the two income household, the parties simply cannot afford all the things they accumulated throughout their marriage. One of the parties, especially when there are children, will want the house. Usually what is done in such a case is that the party awarded the home refinances to remove the other party's name off, thereby paying the other party's share of the equity to that party. However, in some of these cases, a party does not have the ability to refinance. In such cases, there are a few options. One option would be to sell the house. This way the parties can pay off the mortgage and hopefully enjoy the benefit of their share of the equity and/or pay off other joint debts too. This might be a necessary tactic as well if you know your client can simply not afford the mortgage payment or other costs to maintain the home. Another option is to allow the party remaining in the home a period of time to refinance. If he or she cannot refinance after a certain agreed upon time, then appoint a receiver to sell home.
Drafting the Judgment of Divorce
Almost every Judgment of Divorce includes standard clauses to protect both clients' credit. One such provision is the bankruptcy clause stating that any duty, obligation or liability arising under the divorce shall be adjudged non-dischargeable pursuant to 11 USC 523.
Another such provision is the "hold harmless" and "indemnification" clauses. For all property awarded to the opposing party, a statement should be made that that party take all debts and liabilities arising from said property and shall indemnify and hold the other party harmless thereon. The advantages of these clauses are that they do provide the option to seek protection from the family court for compensation if the debt is not paid. The disadvantage is that when joint property is involved and a client's name is still on that property, the judgment only provides protection against the non-payor spouse. The judgment does not protect the client from the third party creditor seeking payment on the debt. What the judgment can do is provide an enforcement tool for the aggrieved spouse by allowing them to sue the non-compliant spouse for reimbursement. Also, these types of hold-harmless debt may or may not be non-dischargeable under 11 USC 523 (b)(15). The bankruptcy court generally will use a balancing test when weighing the dischargeability of these debts.
Another optional provision to add in a Judgment of Divorce is a clause securing the debt with life insurance. This is useful when the parties cannot refinance the debt out of joint names and are attempting to pay it over time. This technique is similar to life insurance to secure child support. Such a provision will instead secure the share of the debt that each party is responsible to pay.
When drafting the Judgment of Divorce keep in mind that the document is a public record. This is frightening, especially since these documents can be accessed via the Internet in many counties. In cases where there is a support obligation, the parties are required to provide personal information, such as social security numbers, driver's license numbers, employment information, health care information, addresses and other identifying information to the Friend of the Court.[x] It is important to note, however, that Friend of the Court records are not public record. This information can be provided to the Friend of the Court in the Verified Statement and modified when changed in the simple form of a letter. It is also important to keep it conservative when identifying property as well. Bank account and credit card numbers in their entirety should be left out of the Judgment of Divorce. Keep this information out of the Judgment of Divorce.