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It may be time to divorce your spouse, but there’s no divorcing your current credit score. Unfortunately, credit is literally the last thing on a divorcing couple’s mind. It’s understandable- but if you want to come out of an emotionally trying time secure in newfound financial independence, credit should become a top priority. From buying a new home or car to sending children to college, your new single tax filing can carry some serious financial baggage. But with help from financial advisors, divorce attorneys and your own budget-conscious, there is such a thing as divorcing with good-great- credit.
- Truly Understand Your Credit Accounts
The first step to managing your credit through divorce is rather simple: get organized. Pull your credit report and create a list of all open credit lines and unpaid debts. Then separate the accounts into three lists: individual, joint and authorized users.
- Individual/Single: Accounts with a sole owner and authorized user (you)
- Joint: Accounts owned and used by multiple people
- Authorized Users: Accounts with one owner responsible for payment, but multiple authorized spenders
Authorized users grants others access to the finances but by legal definition says they aren’t responsible for the balance. While this often applies to older children, it may also apply to spouses or through some medical credit lines, like at the dentist’s office, for example. If you’re the owner of an authorized account, take your soon-to-be ex off the list of authorized users immediately to avoid surprise or unnecessary charges.
Any debt in the individual accounts will also remain your responsibility post divorce. There’s one exception to this, however- technically nine. If you live in one of nine community property states any “individual account” debt acquired while married counts as joint debt. Joint accounts, in all states, are self-explanatory; both parties are responsible for paying off debts incurred. Depending on what the account is for (student loans, car payment, credit card, etc.) and spouses’ ability to effectively communicate post-divorce, divorce proceedings will determine how joint account payments are divided.
Finally, highlight all accounts you acted as a co-signer on. These signatures are critical credit factors individuals tend to forget about, according to Phoenix divorce attorney DeeAn Gillespie. Her first reminder to clients: a divorce is a deal with the courts, not the lender. If your ex falls behind on monthly car payments a year after the divorce, creditors won’t care about your legal separation. These defaulted payments can translate into collector calls and a hit to your credit score. While there’s no immediate responsibility for you to pay off these accounts, treat co-signatures as joint accounts and monitor them closely.
Organization is your friend for divorce proceedings and managing finances. These lists will not only help you understand your current situation but will also help create a post divorce budget and ensure your attorney is knowledgeable heading into negotiations. Eventually, couples must agree on who will presume responsibility of the different debts- not the lightest of discussion topics for divorcés. While mediators and the courts tend to go off a “check and balances” system, family law attorneys, of course, fight for the best interest of their client.
Once a party serves divorce papers, open a new individual account you can transfer debt into and assume full responsibility. This way you avoid any future damage from late payments or even revenge in extreme situations. Opening a new account is also crucial once the divorce is finalized for those presiding in the nine community property states.
- Don’t Get Too Hasty in Negotiations
Depending on the details of your marriage- employment status, income sources, medical expenses- agreeing to pay your share, like your car and gas credit card, is a good rule of thumb to keep civility. However, if you’re a stay-at-home mother or father, for example, this may not be a safe option.
Division of debts and assets is part of every divorce. In some scenarios, like the one aforementioned, one spouse will agree to take on a larger part of the debt than the other. However, it’s important both parties agree to what they can realistically afford while maintaining a healthy credit score. If you’re unsure what this “realistic” amount is, meet with a trusted financial advisor who can outline your current lifestyle and set a post-divorce budget. Even if you are comfortable determining this amount, professional opinions may still be enlisted by your attorney to use as evidence during debt and asset negotiations. These negotiations can, truthfully, include an array of assets and debts and are imperative for many in embarking on financial independence. One of the most important bargaining chips is the house.
Deciding who gets the house, if anyone, is a monumental decision that can also be met with compromises. For instance, if the wife gets the house (an asset, if paid off) she may be asked to give up spousal support or to pay more credit card debt. Initially this may seem great; however meeting with a tax advisor before agreeing to such an arrangement could be critical to starting your single tax filing status with financial security.
Are there mortgage payments? If yes, are the monthly bills too high for a smaller income? Is loss of spousal support worth the now oversized home- money now unable to be spent on groceries or house maintenance? These are just some important questions to consider when deciding who gets the house and all other debts and assets.
- Keep Impulse Purchases Under Control
Whether it’s relieving stress, shopping while you can or just purchasing items the two of you were planning on buying anyway, stop.
Excessive spending can be argued as attempting to sabotage the other party’s creditworthiness after the divorce is finalized, according to Phoenix family law attorney Mark Shields. And while that leans more towards the “extreme” side, there is a chance that previously shared account becomes your sole responsibility; if you can’t pay the bill, you’ll be sabotaging your own creditworthiness.
To make sure neither of these scenarios happen, as unlikely as they may sound now, open your own checking account and start depositing your paychecks in it before the divorce is finalized. If you don’t have an individual income, be cautious of your spending habits and don’t make purchases outside your normal habits. If the latter is your current situation, it’s time to start building credit on your own. There’s many free online resources offering great advice and tips on building credit with no salary.
For any joint accounts, consider setting up an auto-payment during the divorce process to ensure there’s no surprise “late fees” down the road. Remember, any joint debt may become your individual debt. If you’re worried about other shared accounts being closed by your spouse, consider making the auto-payments from your new individual account. Divorcing or not, auto-payments are highly recommended to make sure payments are always made on time. Plus, some loan companies- credit unions or student loan originators, for example- will lower interest rates if payors schedule auto-payments.
- Monitor Joint Accounts
Ideally, divorcing couples should discuss and agree on spending habits during the proceedings while still legally married. Read your monthly statements and discuss (and keep track of) any unnecessary or outlandish purchases made by the other spouse.
Unfortunately, keeping tabs on one another may not go away with the marriage. Because credit accounts are through lenders and not courts, they can’t always be transferred into individual accounts. In these instances, the court will name a responsible payee; the loan company, however, isn’t bound in any way to this family court agreement. Any late payments can and will affect both of your credit scores as it would sans divorce.
Even if the divorce agreements name the other spouse as the payee, ask the lender to send you a copy of the statement each month (or continue to monitor through an online account). If the person is defaulting on their payments, protect your credit by paying the bill and immediately contact your divorce. While the loan company sees both parties as legally responsible, the courts don’t. Defaulting on payments that effect both of you is likely a violation of the court agreement. While the upfront costs may be daunting, especially if the divorce was costly, judges generally order the defaulting spouse to pay out-of-pocket legal fees and the defaulted payments.
Finally, change all your PINs and bank account passwords so no one else can access your finances. Don’t forget to add new and unknown security questions, as well. This adds a necessary security level to your now fresh financial future.
Divorce and money are inherently stressful and facing the two together is daunting. Understanding, reviewing and monitoring spending habits throughout the divorce is beneficial for so many reasons. You and your divorce law firm will know all assets and debts up for negotiations; financial advisors will inform you of good and bad compromises; all parties will be post-divorce budget savvy. Put the “savvy” to good practice, also, and start living on your new budget during the divorce proceedings and check in on your credit monthly. Because one thing is certain after divorce: a healthy credit score is instrumental in starting over.