Divorce and Credit Scores
The correlation between divorce and credit scores dropping into the poor range is so common that marketers often target divorcee's right along with people who have lost their job or have no credit. With reduced resources and more debts, many divorced people find themselves falling behind on their bills. Within 6 months of tight finances, their credit score begins to fall.
So, what can a person do to minimize the damage? Read on for some preventative measures to take before divorce.
Protecting Your Credit Before Divorce
If you're currently separated, just thinking about divorce, or even if you have started the divorce process, you can take steps to protect your credit. Since most people merge their finances when they marry, it's easy to overlook all the joint obligations that they have together.
To begin tracking down those joint obligations, you can get copies of all three credit reports for a very reasonable price (or take advantage of The FACT Act to get them for free). Since creditors don't always report to all three credit bureaus, this will allow you to get a snapshot of your complete credit history. Your credit reports will list joint accounts that you have with your spouse, as well as individual accounts, and any liens or judgments. You will also want to write down any other joint accounts such as utilities, bank accounts, and store tabs.
Handling Joint Accounts Before Divorce
Here is a short list on how to handle the various types of joint accounts:
- Joint credit cards without a balance - If there is no outstanding balance, it is usually best to call the creditor to close these accounts. Many people have been surprised when their spouse goes on a spending spree right before filing for a divorce.
- Joint credit cards with a balance - Since most creditors won't let you close an account that has a balance, ask them to freeze the account. This will prevent any further charges from being made.
- Individual credit cards with an authorized user - If your spouse is an authorized user on your account, now is the time to remove them. Doing so will prevent your spouse from running up the account balance on your credit card.
- Bank accounts with over-draft protection - If the two of you have a joint checking account with over-draft protection you might consider closing the account and opening individual accounts. In all fairness, you should tell your spouse what you are doing and give him or her half of the money.
- Home equity lines of credit - This is another joint credit account that needs to be shut down, especially since it is secured by the equity in your house.
- Utility bills - If both of your names are on the utility bills and one person will be keeping the house, it's a good idea to put all the utility bills in that person's name. Countless people have been notified of their continuing obligation long after their divorce has been finalized.
Understanding Your Debt Obligations After Divorce
A big part of your divorce agreement will center on the division of assets and debts. While your divorce agreement will divvy up the debts between the two of you, it's important to realize that creditors aren't bound by your divorce decree.
Dividing Joint Debts
If you and your spouse applied for a loan together, you are both responsible for repaying the debt, regardless of the stipulations in your divorce. If your spouse will be assuming a joint debt, you should ask your lawyer about adding an indemnity clause to your divorce. Even though the creditors can still come after you for payment, the indemnity clause will let you take your ex back to court for enforcement of the original agreement.
Debt Responsibility in a Community Property State
You may be thinking you're off the hook because you didn't co-sign for any loans with your spouse. But that's not necessarily the case if you live in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA and WI). In these states, both spouses are generally liable for all debt obligations acquired while they were married. Unfortunately, many innocent spouses are caught off guard when they find out they are liable for debts their spouse never told them about.
Given the joint liability issues that occur in a community property state, it's really crucial to have total financial disclosure before negotiating your divorce settlement. Additionally, you should include a clause in your divorce that holds you harmless if your ex defaults on a loan. In the end, you may still have to pay the defaulted loan, but the indemnity clause from your divorce will give you grounds to request that the account be totally removed from your credit files.
How to Handle Deeds and Titles
In many divorces, one spouse is awarded the house and their soon-to-be ex signs a quit claim deed to transfer ownership to the spouse keeping the house. What ends up causing problems down the road is when the spouse who was awarded the house fails to refinance the mortgage solely in their own name. Later on, if the mortgage goes into default, the lender will come after both spouses for repayment.
A similar problem can arise when vehicles are financed in both of the spouse's name. If your spouse will be taking a vehicle that is leased or has an existing loan, you need to make sure that it is refinanced in their name only. If this isn't possible, then it's a good idea to sell the vehicle and split the proceeds.
A good rule of thumb is to never remove your name from deeds or titles if you are still listed as a co-signer on the loan securing property. If your ex is awarded the house or car in your divorce, he or she should refinance the loan so you are no longer responsible for the debt. Additionally, your divorce papers should contain a clause stating that the loan will be refinanced within a certain period of time. After all, it would be a shame having to make payments on something only your ex can enjoy.
© Article by Tracy Achen, owner and editor of WomansDivorce.com, a site dedicated to helping women survive their divorce and rebuild their lives. You can get more insight on how credit is affected by divorce by visiting the website.
In addition to protecting yourself with the divorce and credit tips above, the following articles can help you manage your finances to achieve the best credit score possible:
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