Divorce and Credit: What You Need to Know
By Linda Ferrari
President, Credit Resource Corp.
One out of every two marriages ends in divorce. That's a daunting statistic and one that brings with it an abundance of emotional and financial upheaval for those involved. This statistic also reinforces how important it is that individuals learn how they can protect their credit standing in the face of a major life change; a change that will surely impact their financial situation.
While a divorce is easy enough to obtain and can be done in a fairly short period of time, the financial and credit issues stemming from the dissolution can linger for years afterwards. Confusion or disagreement about who is to pay what bills and who is using specific credit cards can wreak havoc on your credit score. Late pays, no pays, and insufficient funds can quickly cause the very best credit scores to plummet; but it doesn't have to be that way. By proactively taking just a few simple steps, individuals can ensure that they're doing everything possible to start over with their good credit intact.
The following is an example of a proactive plan that will help you to protect your credit during and after a divorce.
Step 1: Getting a Clear Picture
A. Get copies of your credit reports:
Request copies of your credit report from each of the 3 major credit bureaus (Equifax, Experian«, and TransUnion«) so you will have full disclosure of your situation.
B. Get all of your information into one place:
Make a list of all OPEN accounts and accounts with balances. Then create a spreadsheet with columns for the following information:
- Creditor Name
- Creditor Contact Number (If it's not listed on the credit report, you can find the customer service number on the back of your statement. You can also search for it on the Internet. Where there's a will, there's a way.)
- Account Number (Sometimes credit reports do not list the full account number, so you may have to dig up some paperwork; but it will be well worth it.)
- Type of Account (i.e. auto loan, mortgage, credit card)
- Current Status of the Account (i.e. current, past due, collection, etc.)
- Total Amount Due
- Monthly Payment Amount
- Vesting of Account (i.e. Joint/Individual/Authorized Signer)
Step 2: Acting on the Information
Once you've gathered your information in one place, you can now begin to determine the best course of action. There are two types of accounts you will be dealing with: secured and unsecured. Both are handled very differently during a divorce. Secured accounts are all accounts that have an asset attached to them, i.e. a mortgage or a car loan. Unsecured accounts are debts with no assets backing them, i.e. credit card accounts. Here are suggestions regarding both:
A. Unsecured Accounts-Your Options:
- Eliminate Obligations Where You Can: A credit card or a statement with your name on it does not make you a joint owner of the account. Unless the account was originally opened with an application SIGNED BY YOU, you may only be an authorized signer, and you can request to have your name removed from the account immediately. Or vice versa, if your spouse is on the account as an authorized signer, you will want to have their name removed to avoid any future charges. Be aware, however, if negative credit was incurred while your name was on the account, the past information will still remain.
- Close Joint Accounts: If there is no balance on the account, call the creditor and close the account immediately.
- Freeze Any Future Charges: If there is a balance that cannot be paid off right away, the creditor will typically not allow you to close the account. In this case, call the creditor and request to freeze the account from any future charges. This will allow you to pay off the balance over time without making you vulnerable to more debt. Such an action will stop BOTH spouses from using the account, so be sure that you have another credit card in your own name before taking that course of action.
- Transfer Balances to Responsible Party's Individual Card: Request that the responsible spouse transfer remaining balances on a joint card to another credit card with available credit that is in their name only. Once this is done, CLOSE THE JOINT ACCOUNT IMMEDIATELY.
B. Secured Accounts-Your Options:
- Sell It: This is the safest and best option. You sell the asset, pay off the loan in full, wipe the slate clean, and move on.
- Refi It: If your spouse has responsibility and can qualify for a refinance in their own name, or if they have a family member who can assist them with the loan, you can have them buy you out completely. This will allow you to walk away without obligation and get your name removed from the account.
- Be Careful: The least desirable option is to keep your name on the loan with certain terms and conditions. This option leaves your credit vulnerable to the responsible spouse's actions going forward. A late payment or a default on the loan will damage your credit.
Some Important Tips That Will Help:
- Make Sure the Bills Get PaidľNo Matter What The Judge Says: Regardless of what the divorce decree stipulates, it does not override your account agreements with your creditors. Both spouses are liable and responsible for joint debt regardless of who the judge orders to pay the bill. If the bills are not paid and an account defaults, both spouses can be sued; and both spouses can have their wages garnished. Most late pays occur during the divorce negotiations phase. Don't allow this to happen. One 30-day late can drop your score anywhere from 25-75 points, and it takes months to gain those points back.
- Protect Yourself in Joint Account Situations: The best way to handle joint accounts is to eliminate such accounts whenever possible. Because joint accounts are approved using the information from both spouses' credit reports, a creditor will not remove one spouse's name from an account, regardless of the presence of court documents declaring a specific spouse responsible for payment and upkeep.
- If You Decide to Leave Your Name on a Secured Loan Account, Be Sure that Your Name Remains on the Title: Once your name is removed from the title, you no longer own the asset. This means that if the responsible spouse defaults on the loan, and you have to pay it, you'll be paying for something that you no longer own.
- Finally, putting the action plan to work early in the divorce process will ensure that your credit will be protected to the greatest extent possible. Decisive, quick action will empower you to move forward.
Though it may seem challenging at first, you'll soon find that putting the above recommendations into action is easy. You will also have completed the crucial first step toward moving on with your life.