Why does alimony, child support, and separate maintenance income not need to be declared to banks?

Factual Questions
1

At least here in the US, almost every credit application you see will have a blurb somewhere in the area where you are requested to declare your income saying that you do not need to reveal alimony, child support, or separate maintenance income if you do not wish it to be considered for purposes of determining your ability to pay the money back.

It seems to be on so many applications, including 99.9% of credit card applications and personal loan forms. It’s always those three items specifically - I can’t recall ever seeing a form that says you are allowed to omit structured settlement payments, stock dividends, wages from a side job, or that $100 that grandma always sends you on your birthday. It seems that this is more or less a boilerplate clause.

Why is this clause there? Is there a specific law that requires it? Is it not actually required by law but just a recognized best practice in banking and bankers who omit the clause don’t get invited to conventions and are shunned socially in general?

One thought I had was that receiving alimony, child support, or separate maintenance income could be seen as embarrassing and the clause could be there to allow people to potentially get less credit or a higher rate in order to save face and not be looked down upon by banking officials as “one of those people” etc. etc., but then I’ve never seen a credit application that says you are allowed to omit wages earned as a porn actor, welfare benefits, dividends from tobacco stocks, self-employment income earned as a ticket scalper, or other also potentially embarrassing sources of income.

Examples:

http://norstarfcu.com/loan_application.php
http://www.glennvillebank.com/tippins/Loan_Application_and_Insurance_Disclosure.pdf
http://www.fboc.com/forms/CashFlowStatement.pdf

I did find this page (Alimony, Child Support and Separate Maintenance--Does it Count as Income?), which seems to say that some lenders get hung up when you declare alimony, child support, or separate maintenance on an application, sorta put the application on hold, and make you jump through all sorts of hoops in order to prove the income before you can proceed, so maybe the clause is there to allow people who don’t want to go through the rigmarole of finding and submitting all the required alimony paperwork and get haranged by the bank for weeks to submit more evidence, please, also Form G-332 in triplicate with DNA samples and fingerprints of your third grade teacher, and we need form B-56 notarized by the Sheriff too, not just the Mayor and the Attorney General, to go through an abbreviated process that could get them the loan earlier (albeit possibly at a worse rate).

2

Cite

3

Is it due to a question about the reliability or duration of such payments?
Or is it due to the fact that details of a divorce settlement or other civil court case is nunader business?

4

Well, the regulations were promulgated after the signing of the Equal Credit Opportunity Act into law, which was legislated in order to prohibit discrimination by creditors. I’m not familiar with the legislative history of the statute, but according to this paper:

5

Alimony and child support (and presumable “separate maintenance”, which I’m not familiar with) often have specific strings attached as to how this money is spent. For instance, child support must go to paying for clothing, room and board, doctor’s visits, etc. Most of these transactions could be handled in cash, and thus bypass the credit card.

The credit card company is interested in how much disposable income that an applicant has. If an applicants has $10,000 left over each year after paying his mortgage and and caring for his kids, then the company may give him a $100,000 limit, on the theory that it would take him “only” ten years to pay.

Since alimony and child support are cash payments that go directly towards specific expenses, they do not constitute “disposable” income. They simply do not factor into the credit limit calculation. I suspect they may also be legally protected, but the degree of protection likely varies by state.

6

At least in the US, you are oh so wrong.

7

IME, it’s because such payments are not considered a constant source of income. We often have people ask for payment records for mortgages, only to discover if there is a gap the income will not be considered in the process.

And, yeah, runningdude, there aren’t any regulations as to what a person can do with funds received for support/alimony.

8

I can understand that, somewhat, as regards the child support. But alimony? Isn’t alimony no-strings-attached? I always thought alimony was “This is the share of my income that you’d be getting if we were still married.” - In other words, free and clear, do-as-you-like income.

I too, never understood the exemption. And the face-saving idea offered by the OP doesn’t work if the credit application asks about marital status. So I could never understand why someone would want to hurt their chances of getting credit by hiding the alimony income.

If the bank wants to consider the alimony income as unreliable, I suppose they might have a point. But why would the applicant not want to disclose it anyway?

9

It’s not so much that it’s unreliable as that they can’t attach it. The finance company is interested in determine their ability to force repayment if you fail for whatever reason. They can attach your paycheck for a small amount each month if they get a judgment against you. They can’t do this with child support payments.

I don’t know if the same is true for alimony payments, but I suspect it would be far more difficult at least.

10

A divorce can indirectly affect one’s credit score as a significant negative. If it weren’t against the rules, the banks would probably like to just mark a divorce as a “negative trade” by itself. All the disentangling of debts, adjusting the new bills’ rates based on a new individual’s score, rather than a combination, missed payments and disagreements over whose debt it is; it costs creditors money to deal with. The existence of alimony would tip off an underwriter to a divorce, and the added income might be offset or even overcome by the knock against one’s credit worthiness.

11

Yes, but as I said (and you included in your quote) they already ask about marital status, so the “divorced” flag has already been raised even before getting to the financial numbers.

12

I don’t think they do ask about marital status- in fact they’re not allowed to require it in an application for individual credit in most circumstances and the question can only use the terms married, unmarried ( never married , divorced or widowed) or separated .

http://www.bankersonline.com/regs/202/202-5.html

The closest the applications ones linked in the OP get to asking about marital status is that one asks for the relationship of the joint applicant to the applicant.

13

If you are awarded alimony or support, then odds are the legal (dis)entanglements have already been sorted out.

I suspect the “inability to attach” is the answer. I asume too, then when seeking garnishment orders, this money is also not accounted for? (I.e. you can only take X% of person’s income - does the judge include alimony or supportpayments in arriving at the maximum allowed to attach? )

Support payments are technically for the support of a child, therefore not intended to be disposable income for the receiving spouse.

14

That is indeed interesting. If they aren’t allowed to ask about being divorced, I’ve got to wonder why they are allowed to ask about being separated.

15

I make no representation that the “strings” are formal or legally binding in all circumstances. The law allows the credit applicant to voluntarily report such income as a potential basis to repay the debt if he or she so wishes.

16

An applicant need only disclose the existence of a spouse if the spouse will have access or be responsible for the card. Marital status only comes into play then. Gender also need not be disclosed.

Much of this is about women fearing discrimination. Lending has not always been “equal opportunity”, and even today is not always perfectly so.

Even discrimination aside, an applicant may still wish to rely on the banks credit worthiness formula to help stay out of financial trouble. If the applicant has this protected income that is already spoken for, then he or she may be willing to accept a smaller credit limit to avoid encroaching on these fixed expenses.

The key is that this is voluntary. An applicant may choose to disclose or withhold this income based on his or her financial strategy.

17

Because there is such a thing as legal separation.

18

And there’s such a thing as legal divorce, too. So why one and not the other?

19

What are the legal implications of financial arrangements for a separated but not divorced couple? Is it not the case that in any situation spouses are no automatically longer responsible for each others’ debts nowadays unless they cosign or consent? Why would marital status be at all revelevant in any financial dealings?

I would assume by the time legal separation rolls around, there are no joint accounts left, and probably the only area of concern is the jointly-owned house and how it will be resolved at divorce.

20

My guess is that it has to do with community property states. Legally separated people are still married and community property rules apply to them. What surprises me is that the lenders would even want to distinguish between separated and other still-legally-married couples. They would probably be better off just asking if the person was married or unmarried. But maybe it’s not the lenders who want to make that distinction-perhaps the applicants want to signal that althought they are still married and community property statutes apply, the finances are completely separate and the spouse’s bad credit history shouldn’t be held against them and the lenders being forced to allow it.