Divorce and Credit 101

Going through something as painful as a divorce isn’t easy, nor is it easy on your wallet. For anyone who’s been unfortunate enough to go through this emotionally AND financially trying time, the old saying goes:

“Love is grand but divorce is 100 grand.”

I firmly believe that almost any situation can be resolved through counseling, honesty, give-and-take, and remembering what made you want to get married in the first place, but sometimes even those don’t seem to work. If you and your spouse have exhausted every avenue of reconciliation and you both still want to permanently separate, here are some important factors to remember:

Divorce and Credit

Most people going through divorce have little understanding of how it will affect the accounts that they formerly held jointly with their spouse. They also have very little understanding of how it will affect their individual credit reports, regardless of the divorce decree by the judgebecause creditors are under no obligation to remove one person’s name from a credit account. Here’s a quick breakdown of how divorce can lead to bad credit.

• Even if the divorce courts divide the debts that you and your former spouse accrued jointly during marriage, you’re both still legally responsible for any outstanding balances. That’s what you signed and agreed to in that ridiculously long piece of paper called “The Application” … remember?
• If these accounts aren’t kept current, creditors can pursue both parties for payment. The delinquent accounts will appear on both your and your spouses credit report.

Ouch.

So even if your former spouse is named responsible for individual debts by court order, if he or she fails to pay off those debts, your credit will also be damaged if you never formally removed your name from the accounts. The court will not do it for you! And just because you ask, even if you ask in writing, to have your name removed, most banks and other credit issuers are under no obligation to do so.

Look at it from the creditor’s perspective: things can get nasty in a divorce … and that’s usually the only reason one party wants his or her name removed from a credit account. With TWO names on the account, the bank’s chances of getting paid by someone are effectively doubled.

You can protect your credit after a divorce by taking the following actions, but ideally, you should do all this before the divorce is finalized:

• Open an individual credit card if you don’t already have one.
• Pay off any joint credit card accounts with joint funds (by check for the paper trail) and then close the accounts.
• If you’re unable to pay off joint accounts in full, roll the outstanding balances into a new individual credit card account, making the court-ordered individual solely responsible for the debt.
• Remove any authorized users, such as your spouse and your spouse’s family members, from your individual accounts.
• Sell or refinance your home if it’s in both of your names. Most banks want mortgages be refinanced before one party can be released from responsibility for the loan.
• Refinance any car loans so that only one person owns each car and is responsible for its accompanying debt.
• Keep up with regular payments until all debts have been successfully transferred to the person that the court has ruled responsible.

Not only is divorce expensive from the monetary perspective (lawyer’s fees, unusual expenses, new apartments, deposits, etc), but it can slash your credit score. Why? All the applications for new credit will have a damaging effect as will closing old joint accounts. In addition, as a single person, your credit score may take another hit if you qualify for a lower credit limit than the one you shared with your former spouse.

Divorce and Name Changes

If you changed your name as a result of the divorce (such as taking back your maiden name), be sure to inform your creditors of the change to avoid losing your credit history. The credit bureaus will record your name change the next time your creditors submit their reports.

Rebuilding Credit in Your Own Name

If most of the credit obtained during your marriage was in your spouse’s name only, you may have very little credit history. At this point, you should  quickly begin to establish credit in your own name by

• Start your own budget.
• Following good credit practices.
• Applying for a new credit card, a secured credit card or charge card.
• Opening a savings account and checking account.
• Applying for a small installment loan.
• Paying all your bills on time and in full.
• Building your own emergency fund.

Going through such an emotional time and having to be worried about practical matters is difficult. But in the long run, you’ll be glad you kept your wits and took these constructive and pragmatic steps to protect your personal finances.

Photo by Gulzar2

Tagged as: budget, checking account, Credit, credit cards, Debt, divorce, divorce decree, joint accounts, savings account