Divorce and Credit Scores
The correlation between divorce and credit scores dropping into the poor range is so common that marketers target divorcees 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, order a copy of all 3 Credit Reports to get a snapshot of your credit history. This 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.
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
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 credit together, both of you are equally responsible for paying off 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 Community Property States
As if being responsible for joint debts wasn't bad enough, you also need to be aware of how debt responsibility is handled in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin). In these states both spouses may be held responsible for all debts incurred during the marriage. This means that creditors can come after you for repayment of a debt that your spouse never informed you about.
To help protect yourself if you live in these states, full financial disclosure is important during settlement negotiations. You will also want to add an indemnity clause to your divorce that holds you harmless if your ex defaults on the loan. In the end, you may still have to pay the defaulted loan, but your indemnity clause will allow you to request that the account be totally removed from your credit report.
Deeds and Titles
When a couple splits, one spouse often decides to keep the house after the divorce, and the other spouse will sign a quitclaim deed to transfer title. What ends up causing problems down the road is that the mortgage never gets refinanced in the name of the spouse keeping the house. Later on, if the mortgage goes into default, the lender will come after both spouses for repayment.
The same thing happens when one spouse keeps a vehicle that was financed under both of their names. 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.
The lesson here is that you shouldn't take your name off a deed or title if you name is still on the loan. If your spouse will be keeping the home or vehicle, you need to make sure that the loan is refinanced in his or her name only. In fact, you should add language in your divorce decree requiring such. After all, you don't want to be paying for something that you no longer own.
© 2008 by Tracy Achen. At WomansDivorce.com we have one focus - helping women survive their divorce and rebuild their lives. You can get more information on credit and divorce in the following articles:
Does Divorce Affect Credit Ratings? - The effect of bad credit.Protecting Your Credit During Divorce - Minimizing the damage.
Debt and Divorce - Debt responsibility in divorce.
Dividing Debts in Divorce - Tips for dividing assets and debts.
Rebuilding Your Credit After Divorce - Rebuilding your finances.
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:
Good Credit Practices
Fixing A Credit Report Mistake
Raising Your Credit Score
Negotiating Debt Hardships
Credit Advice articles
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