Deciding to end a relationship with a loved one is one of the toughest calls to make in one’s life. During and after the dissolution of a marriage, couples can struggle with feelings of loss, anger, regret, failure – and even financially as well.
Child support, alimony, asset division, legal fees – all these can impact your finances. Once divorced, your living expenses may also consume a significant percentage of your household income. One question that you might forget to ask yourself is, “will divorce affect my credit?”
If you’ve recently been through a divorce, or you’re still thinking about it, you may want to look at issues that touch on your credit and divorce. There’s good and bad news about this. The good news is that the act of getting a divorce doesn’t directly impact your credit. However, some of the financial changes involved during a divorce could potentially hurt your credit score. It’s, therefore, your responsibility to know what could actually go wrong and prepare for this with the help of an attorney who’ll help you illuminate on potential pitfalls.
There are generally two types of credit accounts: joint and individual. You can allow authorized persons to access either account. When in need of a mortgage loan or charge card, you’ll be required to choose one type. Here’s how these two different account types work and how credit and divorce are connected.
Your credit history, income and assets are all considered by the creditor. You’re responsible for any debt, whether married or single. This account will appear on your credit report, as well as on the credit of any authorized users.
However, if you live in any of the community property states, Arizona, Alaska, Louisiana, Nevada, Texas, New Mexico, Wisconsin, Washington, California and Idaho, both spouses in a marriage may be responsible for debts incurred in the union. These debts may also appear on both spouses’ credit reports.
As for joint accounts, your income, financial assets as well as credit history – along with your spouse’s – are all considered. Regardless of who pays what bills, both of you are responsible for the repayment of debt.
Your lenders only want to see payments. A spiteful ex may deliberately avoid making these payments just to cause you trouble. If this is the case, it’s best to make changes to the account.
Credit and divorce
If you’re thinking about a separation or divorce, pay close attention to how your divorce and credit accounts are linked. If you share joint accounts, its important to make regular payments so that your credit isn’t affected.
If you have joint accounts and you split, you may want to close any joint accounts or accounts in which you allowed your spouse as an authorized user. This request has to come from you since a creditor has no legal authority to close joint accounts due to a change in marital status.
How debt is split during a divorce
Notably, each state has its own rules around assets and debts. Joint debt is an area most people make mistakes. You might believe that once a judge pronounces your spouse to be responsible for a debt, you don’t need to worry anymore about it.
Your divorce decree will spell out how debt will be divided. Debt is categorized as follows:
- Credit card debt
- Medical debt
- Mortgage debt
- Auto loan debt
If it’s a credit card in your spouse’s name only, you won’t be responsible. But if it’s a joint credit card debt, you’re more likely to share it regardless of whose name bears it.
If you live in community property states; Wisconsin, Washington, Arizona, Alaska, Idaho, Texas, Louisiana, Nevada, California, and New Mexico, you’ll have to pay your spouse’s medical debt. However, in equitable distribution property states, the courts will look at various factors before deciding.
If both of you are on the mortgage, the best decision out of it is selling the house and splitting the money. While you might be advised otherwise for the sake of the children, this is by far the best way to settle such a debt following divorce. You can also decide to buy out your spouse, or the other way round.
Auto loan debt
If both names are on the auto loan, it’s best to approach a lienholder and ask them to refinance the car without your spouse.
Avoiding credit problems after divorce
The first step you should take is getting a copy of your credit report even before filing for divorce. This credit report will inform you which accounts need to be dealt with and which ones you’re not aware of. You can then reconcile your accounts with the report. Share this with your lawyer only, and don’t confront your ex-spouse even if you notice some irregularities. Separate any revolving debt accounts, and take accounts with only your name on them. Close any joint accounts to prevent your ex-spouse from transferring balances from their own accounts to joint accounts.
You may need to cancel and replace your credit cards even if they’re not joint credit cards or have your spouse as an authorized user. If your spouse knows the 3 digit security at the back of your card, they can go online and wreak havoc.
After divorce, remember to create a post-divorce budget that will help you adjust to your new income and expenses, and avoid credit problems.
What if my spouse files for bankruptcy?
If your spouse files for bankruptcy for whatever financial reason, it might affect you. Bankruptcy will not protect you unless you also file. Filing for bankruptcy only gives out a person’s liability for the debt but doesn’t eliminate a joint debt.
The best and ideal strategy is to pay off any debt before finalizing your divorce. However, this is not always possible. Don’t hesitate to talk to your creditors if you’re facing trouble keeping up with the payments. They might offer you an ideal payment plan.
Walking on the financial abyss of divorce is uncomfortable, but it also has its end. The quicker you separate your finances from those of your spouse, the easier the process will be. Seek more advice from your support network comprising of family, co-workers, support groups, church members, etc.