You’ve probably heard horror stories from friends, family members, and even strangers about how a divorce devastated their credit rating and left them unable to finance purchases or qualify for new credit. Unfortunately, damaged credit as the result of a divorce is a common scenario. If you find yourself facing divorce, there are precautions you can take before the divorce is final to protect your credit and ensure that your future buying power remains strong.
How Divorce Can Lower Your Credit Rating
Not everyone who gets divorced suffers credit problems afterward. Credit issues after a divorce are directly related to the debt management ability of both parties and whether those parties share debts. The most common example of shared debt is a mortgage loan. Should both your name and that of your spouse appear on the mortgage loan, both of you are equally responsible for the debt. Even if the divorce court judge assigns the property to your spouse during the divorce proceedings this does not dissolve your legal responsibility to make the mortgage payments. Thus, if any payments are late, those late payments will damage the credit rating of anyone whose name is on the loan.
Dispose of Major Assets
Don’t expect your mortgage or vehicle lender to be willing to simply take your name off the loan when you get divorced. Doing so does not benefit the lender in any way. As long as your name appears on the original contract, you are legally liable for making the payments on the asset – regardless of whether or not the asset is currently in your possession. The more people that are responsible for a debt, the greater the lender’s chances of getting paid. Thus, a request to your lender to remove your name from the loan is unlikely to be successful.
One sure way of dissolving your liability for a secured debt, such as a house, car, or boat, is to sell the asset for enough money to cover the amount that you and your spouse still owe on the loan. The amount you receive for the sale of the property can then be used to pay off the outstanding debt. Both of your credit scores will improve after the sale due to the fact that a major installment debt has been paid in full. In addition, the spouse who is not assigned the asset by the court during the divorce does not have to live in fear of credit damage.
In some cases, your soon to be ex-spouse may object to the sale of the item. Should this occur, let your spouse know that he or she is welcome to keep the item after refinancing it into his or her own name. When the asset is refinanced, the old loan will be paid off and replaced with a new one. The new loan will be in your spouse’s name only. This dissolves your legal responsibility to your old lender.
Keep in mind that signing a quit claim deed or having your spouse sign one does not dissolve either party’s obligation to pay the mortgage. When you sign a quit claim deed, you are signing away your legal rights to claim any equity in the home – not your responsibility to meet the payment obligations you originally agreed to. Many individuals have discovered the hard way that a quit claim deed does not protect them from credit damage when their ex-spouse defaults on the home loan they once shared.
Separate Joint Accounts
If you have a joint credit card with your spouse, do not assume that just because the account is assigned to your spouse in the divorce that you will not be called upon in the future to pay any outstanding debt that has been charged to the card. The same legal liability applies to credit card accounts that applies to loans. Each account holder is equally responsible for making the payments. Not only can your ex-spouse’s failure to do so damage your credit, but the credit card company can sue you and garnish your wages for debts your ex-spouse incurred and failed to pay years after your divorce was finalized.
Close all joint credit card accounts that you share with your spouse. Like other lenders, credit card companies are unlikely to agree to simply remove one account holder’s name from the account. Once the account is closed, you are free to apply for a new credit card in your name only. Although closing a old credit card account can shorten your credit history and have a temporary adverse effect on your credit score, doing so is preferable to the alternative of risking a lawsuit or collection account due to another person’s faulty debt management skills.
Don’t forget to close your joint bank accounts as well. As long as your spouse’s name remains on your bank account, he or she can withdraw money and accrue bank fees that you will have to pay. Failing to pay bank fees will result in a bank remitting your debt to collections and damaging your credit score.
Ask the Court for Help
If your spouse is uncooperative in agreeing to split up your assets, you can petition the divorce court for help. This is one reason why it is imperative that you separate your accounts prior to the divorce being finalized. Until the divorce is final, the court reserves the right to order your spouse to work with you to separate all joint accounts. Should your spouse fail to do so, he or she can be held in contempt of court.
Regrettably, once your divorce is final, you will have little, if any, legal recourse to convince your ex-spouse to dispose of marital assets. Some unfortunate individuals have even had a vindictive ex-spouse deliberately stop paying debts in order to cause damage to their credit rating. Even if you are sure your divorce will take place under good terms, it is important not to put yourself and your finances at risk.
Check Your Credit Report
After you have successfully disposed of all of your joint assets, keep a close eye on your credit report. Creditors and lenders sometimes fail to acknowledge that the debt is no longer yours and continue to update your credit report as if you were still liable for the original debt. This puts you in the same position you would be in if you had not gone through the trouble to dissolve your joint accounts. If you discover that a lender or creditor is still updating your credit report with an account that is no longer yours, notify the company in writing and provide a copy of any paperwork you have that proves your name is no longer on the account. Do not overlook the error just because your ex-spouse is current on his or her payments. All it takes is one mistake to lower your credit score.
Divorce can be extremely taxing on your emotions as well as your finances. In the future, your emotions will recover, but unless you take the time now to prevent damage to your credit rating by separating your debt from your spouse’s debts, your finances could continue to suffer from the effects of your divorce for years to come. No matter how responsible you know your spouse to be, extenuating circumstances could leave you on the hook for debts you didn’t know you had.