Can You Be Liable for an Ex-Spouse’s Debts?
Q: About three months ago I received a $2,000 credit card bill. My ex-wife ran up these bills in 1989 and filed for bankruptcy early this year. We have been divorced since mid-1987 and we separated in November, 1986, the same month she applied for the credit card that has the $2,000 overdue balance. Apparently, my ex-wife put my name on the card. I had no idea it was there, and no mention of the card was made in our divorce papers. The bank says I am responsible for this $2,000 bill. Am I? --T.C.
A: Unfortunately, you have not given us enough information to make a thorough and precise assessment. However, based on what you have revealed, we can say that you are probably not responsible. Still, you would be well advised to see an attorney if the bank is truly pressuring you to pay or has threatened to sue or downgrade your credit rating.
Could someone possibly be liable for an ex-spouse’s credit card debts, especially four years after the divorce?
It does seem mind-boggling that the bank would attempt to hold you responsible. However, according to credit card and bank officials, the contract governing the credit card, as well as individual state laws governing community property, can leave someone exposed to subsequent bills racked up by an ex-spouse. Much depends on the terms of credit card contract and whether you live in a community property state, such as California, where assets and debts are, unless otherwise specified, shared equally between spouses. Even if you never signed the credit card application, lenders say it is still theoretically possible, under community property laws, for you to be held liable for debts accrued on a card issued to your spouse while you were still married but long after the marriage dissolved.
Clearly, however, most consumer interests would consider such a position unreasonable. And, in fact, our legal experts say a judge probably will agree, taking the position that you should not be held accountable for debts accumulated years after the divorce on a credit card that was not yours.
What should you do? One of our legal experts suggests that the bank, and its zealous collection agents, have overstepped their authority and have no grounds on which to force you to pay for debts on a credit card that you neither signed for nor used.
She advises waiting out the bank and consulting an attorney only if you are sued or the bank attempts to downgrade your credit rating. “Until they sue you, what they say doesn’t mean anything,” she argues. “And if they do sue, I don’t think the bank is likely to win.”
Now, what about the rest of us--even the seemingly happily married? Our legal experts recommend that we read the fine print of our credit card contracts to determine our potential exposure if marital bliss sours. Credit card company officials strongly urge couples who are separating or divorcing to open two individual credit card accounts to minimize confusion over future debts.
But even before the marriage hits the rocks, some family law attorneys advise couples to investigate the full extent of the other spouse’s credit card holdings, including department store accounts and business credit lines. What can you do if your spouse won’t cooperate or you’re confused about what you uncover? Run a credit check on you and your spouse through TRW or some other credit-rating agency, the divorce attorney responds.
Saving Taxes When Selling Rental House
Q: I own a rental townhouse in which a lot of equity has built up. I am thinking of selling it in the next few years and wonder if there is a way to avoid the huge tax consequences I will face. Someone told me that refinancing the house and withdrawing a huge chunk of the equity would do this since the new appraisal value and new mortgage would be considered the purchase price in place of the original one. They said I would then have to pay capital gains tax only on the amount above and beyond the loan value. Is this true? --J.C.P.
A: Not on your life! When the government tells you to use the purchase price of your property when you compute the gain on your home sale, they mean just that: the original purchase price. Whether you refinanced your property is not a factor.
When you compute your capital gains you must use your original tax basis in your property, and nothing else.
To arrive at the tax basis of your rental unit, you take your original purchase price, add the cost of any improvements you made to the property and then subtract the amount by which you depreciated the property while you held it as a business investment. Now to compute your gains, you take the sales price, subtract selling costs and then subtract your tax basis. This is your taxable gain.
If you want to defer paying taxes on the gain, you can reinvest the entire proceeds in a new piece of investment property through what is known as a Section 1031, or Starker, exchange. This provision essentially allows you to roll over your gain into a new piece of similar investment property without paying taxes on it. However, the tax obligation is only delayed, not forgiven.
For more information on these exchanges, which can be complicated, you should consult your accountant or tax attorney.
