How Will My Divorce Affect My Credit?
In the unfortunate event that you get a divorce, worrying about your credit score may be the last thing on your mind. However, even during the most trying times of our lives, the world keeps spinning and the fact is, divorce can greatly impact your finances and credit history. If you are seeking or have finalized a divorce, it is time to assess what needs to be done to preserve or restore your financial reputation. Below, we will explain how divorce can affect your credit, as well as what you should do before and after your separation.
Divorce and Your Credit
You should know the ugly truth first: even the most amicable divorce can leave you in financial ruin. In the course of your marriage, you most likely merged all of your finances, from your bank accounts to ownership of property. A majority of marriages also have one partner who takes most of the responsibility when it comes to paying bills, which inadvertently leaves the other person in the dark about a lot of things. All of these arrangements, once just a common aspect of a committed relationship, contribute to credit problems upon separation.
When you get a divorce, it is your marriage that is ending and not your shared financial responsibilities. Even if your spouse accumulated some debt without your knowledge during the marriage, you may be held responsible for it after the divorce. That is, of course, if you don't take the proper actions and sever all financial ties with your ex (excluding any child or spousal support, of course). This doesn't have to be as nasty as it sounds, either. In fact, most divorcees are pretty eager to get on with their lives, rather than dragging out the affair with bitter opposition. Not all divorces are as heated as the ones you see on television. However, even if your partner is being reasonable about things, it doesn't mean that creditors will show the same cooperation. That is why the ties must be severed sooner rather than later.
Protecting Your Finances Before the Divorce
While you may not want to think about money when you are experiencing a traumatic life change such as divorce, being practical may save you from even more heartache down the road. The best way to keep your credit safe from divorce is to start making changes as soon as the two of you decide to separate. The following steps should be taken:
- Assess Your Responsibilities — You need to be aware of all the accounts you are responsible for, including bank accounts, mortgage loans, credit cards and utilities. Even if you and your spouse have decided who gets what property, you need to make sure that the right person is solely responsible for their respective belongings.
- Dissolve All Joint Accounts — Rather than trying to divvy up what is owed on your joint accounts and asking your ex to honor their half, you should remove the right person's name from the accounts or cancel them completely. Make sure the both of you do the canceling together, legally. The first place to start is the bank, as most couples share checking and/or savings accounts when they are married. Also, if you are taking possession of one car with both of your names on the note, have your spouse's name removed. Make sure that your spouse does the same thing with any property they take. (If you are still paying for any of this property, then you may have to refinance to get the loan down to one name.) Any bills you paid together, such as your utilities, should be put in one name. As for credit cards, you can try to work with the credit card company and have them transfer half of the balance to two different accounts in anticipation of the divorce.
- Sell the House — A common mistake that people make is giving their house to their spouse after the divorce. This may be due to abandonment or perhaps a well-intentioned arrangement because there are children involved. However, the best thing to do is to sell the house together and divide the profit. After all, no one can predict the future. Countless divorcees have found their credit ruined because their ex let their house go into foreclosure. Explaining to creditors that you are now divorced won't make you any less responsible for a mortgage with your name on it.
- Divide Any and All Shared Cash — In the process of allocating debt, canceling accounts and selling property, you and your spouse will probably be left with some liquid assets. You should, perhaps with the assistance of your divorce lawyers, fairly divide that cash before you walk out of each other's lives. This is the legal, sensible and ethical thing to do.
- Document Everything — Once the courts become involved and your divorce is finally underway, make sure that all of your financial arrangements and agreements are documented. That way, if there are any discrepancies down the road (such as a creditor bugging you about your ex's car payments), you can refer anyone to your official court records. While this may not be a surefire way to get a collector off of your back in a timely manner, you will have the law on your side and the means to protect or restore your credit.
Saving Your Credit After the Divorce
Hindsight is always 20/20 and many people get a divorce without preparing their finances beforehand. This is understandable, as it may be hard to set aside emotions long enough to get everything in order. However, not doing so can result in serious issues with your credit score. If you have already finalized your divorce and are now being held responsible for your former spouse's debts, make sure you do the following.
- Check Your Credit Score — This is something you should do at least once a year, but it is especially important after major life events. By checking your credit score you can see if your credit has been adversely affected by your divorce. It will also show if there are any debts that you used to share with your spouse that are now being neglected. This will point you in the right direction when it comes time to cancel any joint accounts.
- Separate/Cancel All Joint Accounts — Even if you ended your divorce on very bad terms, you simply must have a sit-down with your ex. Any and all accounts, debts and property that you still share should be separated, canceled or sold. In other words, you must separate your finances like you have separated your relationship. This can be most easily accomplished with your former spouse's help. If he/she won't help, it is time to call your lawyer. Either way, your financial ties must be severed.
- Notify Creditors of Your Divorce — Once you have separated/canceled all of your joint accounts/debts, you are no longer legally bound to your former spouse's current debts. Call all of the creditors who have been bothering you and alert them to this fact. In a perfect world, they would apologize for the inconvenience and never call you again. However, it may take awhile before such calls cease entirely. In addition to notifying the proper collectors, you should right a letter to them as well. That will help them to expedite their file updates.
Divorce is an ugly thing, no matter how it is carried out. The end of a marriage is a traumatic event that is only compounded by high court costs and possible credit problems after everything has settled. If you are thinking about divorce, follow the proper steps in separating you and your spouse's finances. Otherwise, your credit score may plummet until everything is in order. The modern world revolves around credit, so a low credit score can have a devastating effect on your life. By taking the measures listed above, you can avoid any further distress than divorce has already caused you.