Avoid Credit Damage Caused by Joint Debt After Divorce
A divorce process can be a very challenging time with a lot of difficulties both emotionally and even financially. Thinking about the financial implication can be very confusing at this point. In the midst of the chaos of a divorce, people often tend to overlook their credit. Unfortunately, that’s a big mistake.
When you fail to protect your credit during a divorce, your credit scores might suffer. And, if your divorce does damage your credit, those issues could haunt you for many years to come. This article will aim to provide you with tips that can help you avoid damaging your credit after the divorce process especially if you have joint debt.
- How Can Divorce Hurt Your Credit?
- What Can Happen to Debt After Divorce?
- How to Protect my Credit During a Divorce
- How to Protect my Money During a Divorce
- How to Protect Yourself From Future Financial Troubles After Divorce
- What Should You Do With Joint Credit Cards When You Get a Divorce
How Can Divorce Hurt Your Credit?
Divorce doesn’t automatically trash your credit scores. In fact, you don’t have to worry about the divorce itself hurting your credit at all. Your marital status isn’t reflected on your credit reports and it has zero direct influence over your scores.
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Still, it’s no secret that divorce and credit problems commonly go hand in hand. Here are two reasons why your credit scores might drop during a divorce:
1. Creditors don’t honor divorce decrees.
Disentangling joint finances and accounts is a complicated part of the divorce. If your divorce is a messy one, separating joint accounts can become an absolute nightmare.
During your divorce, the court will issue a ruling known as the divorce decree. Your divorce decree details the division of your marital assets and debts, including which spouse is responsible for paying each creditor.
If you have a joint car loan, for example, your divorce decree will say who keeps the vehicle and who has to keep up with the payments on the loan.
There’s just one problem. Creditors and debt collectors don’t honor divorce decrees. If a judge orders your ex to pay a joint credit obligation, but he or she fails to do so, your personal credit could suffer.
2. Joint accounts stay on your credit reports.
Whenever you initially open a joint credit obligation with your spouse, the account may be added to both of your credit reports with Equifax, TransUnion and Experian (depending upon the lender’s policy).
Divorce doesn’t dissolve the joint accounts you opened with your ex nor does it remove them from your credit reports. Your lender will still expect both of you to pay back the money you borrowed, plus interest, as you initially agreed. The account will also remain on your credit reports, regardless of who is responsible for it in your divorce decree.
Here’s why this can be a problem. If your ex is responsible for making payments on a joint account and pays late, the late payment will show up on your credit reports and could damage your credit. If a jaded ex-spouse decides to make a bunch of charges on a joint credit card account, you’ll still be responsible for paying the debt. In fact, a high credit utilization rate on a joint credit card could hurt the credit scores of both you and your ex, even if all payments are kept on time.
The easiest way to separate joint accounts is to cooperate with your ex and find a solution that protects each of your credit reports. Of course, depending upon whether your separation was amicable, this may or may not be a realistic expectation.
What Can Happen to Debt After Divorce?
If you accumulated a lot of debt during your marriage, it’s important to understand what happens to debt when you get divorced. You may not be responsible for things you think you are, and you may owe on debt you were sure your spouse should cover. Ultimately, a lot of the legal responsibility will come down to whose signature is on a loan paper and whose name the loan is under.
Legal liability for the debt
Is one spouse responsible for the debts of the other? Well, it depends. If you signed on a loan as the borrower or if you cosigned a loan for your spouse, you are legally liable for the debt that accompanies it. Any late fees charged due to a spouse’s delinquent payments will also legally be your responsibility — even if they tell you that they’ll take care of it. If your name is on the loan, you owe the money. It’s that simple.
Let’s say you took out a loan for your partner with the agreement that they would pay it. You may both agree that the person who said they’d pay the loan is the one who owes on it after the divorce, but that agreement may not hold up in court if you’re the sole borrower.
Debts owed to insurance companies follow a similar protocol. If your name is on the loan as a borrower or co-signer, you owe it.
How to separate assets
An important step in safeguarding your finances is to separate your assets, but doing this isn’t always as easy as it sounds.
A prenuptial agreement — or a “prenup” for short — is an agreement in which both parties state that they are only entitled to the assets they brought into the relationship in the event of a divorce. In other words, they do not split assets when the marriage ends. The same asset stipulation can be made by signing a post-marital agreement, but spouses agree to this kind of contract after getting married.
While both of these agreements are useful in keeping assets separate, they may not protect you from shared debt that was accumulated while you were married.
You can also secure your finances by investing your money in protected accounts. If the question: “Am I responsible for my husband’s debts if we divorce” haunts you, you might want to sock money away in retirement plans, trusts, corporations or annuities where your money is likely to be safe from the other party.
While doing this may help safeguard your assets, it’s still wise to consult a trusted financial advisor before committing to such a plan.
How to Protect my Credit During a Divorce
Every divorce is different. Detangling your credit obligations from your ex-spouse is complicated, regardless of your gender.
Ultimately, it’s up to you to try to safeguard your credit from damage during a divorce. These three tips might help.
- Close joint credit cards and remove your ex as an authorized user from any credit cards which are open in your name only.
- Freeze your credit reports with all three credit reporting agencies to prevent a vindictive ex-spouse from opening fraudulent accounts in your name.
- Cooperate with your ex to separate joint accounts when you can. For example, if you have a joint mortgage, the spouse keeping the home could be required to refinance the loan into his or her name only. Another option with joint loans (like mortgages and auto loans) is to sell the asset (e.g. the house or the car) and use any profits from the sale to pay off other joint debts.
- Open your own bank account. To protect your new finances, consider opening a new checking and savings account with an online bank. Online banks can offer convenience and tend to have higher interest rates on savings than traditional banks. For example, an online savings account with Capital One offers 10 times the national average for all balances and doesn’t have a minimum balance requirement.
Sometimes credit damage during a divorce is unavoidable. If you’ve been a stay-at-home parent, for example, and you suddenly have to find a job, it may take a little time to get on your feet financially. Your creditors, however, won’t wait for their payments.
Late payments, defaulted accounts and collections can all take a toll on your credit. In severe cases, you might even need to file for bankruptcy protection from your creditors during or after a divorce.
If you’ve experienced credit damage because of a divorce, here’s the good news. Your credit can be rebuilt over time. You should do your best to protect your credit during a divorce if you can, but know that you don’t have to be stuck with damaged credit forever if the worst should happen.
How to Protect my Money During a Divorce
If you’re worried that one spouse is responsible for the debts of the other during a divorce, you should find a way to protect your money during the divorce process. Couples often create joint debt while married, and the “what’s mine is yours” mantra can backfire if they decide to divorce.
If you want to protect your finances during your divorce, it would be wise to stop using joint credit cards so that it’s clear to who the debt belongs. If possible, you should close down joint accounts entirely.
Try to get your name taken off of any joint credit cards or remove yourself as an account cosigner. This can be difficult, though, because some credit institutions prefer to have two sources of income attached to an account. In such cases, make sure to keep track of spending activity so that you can demonstrate who is responsible for the debt.
If possible, try to pay down as much community debt as possible before entering into divorce proceedings. Though this may seem unfair, practicing sound divorce debt consolidation before moving forward with the actual divorce can make it easier to determine which party is responsible for the debt.
Your credit score is impacted by your financial habits, such as paying off personal debts and the amount of disposable income to credit debt, and the actions taken jointly during your marriage can affect your score as well. If you take out a joint loan on a home or open a credit account together, you are liable for any financial delinquency on that debt. If your spouse was supposed to pay off debt and forgot to do so, the penalty from the late payment will affect both of your credit scores.
Try to remove yourself from joint accounts to protect your credit score from irresponsible actions by your former partner. Make sure that any outstanding debts get paid off as well. It can be tricky to get your name off of credit that you signed for with another party, but you can try to refinance your existing loan to make just one person responsible for it. That may not work in every case, but it’s worth a try.
How to Protect Yourself From Future Financial Troubles After Divorce
Divorce can be a long and challenging process. You need to make decisions about everything from mundane details to highly-charged topics. That includes debt that you took on jointly with your spouse. Don’t just assume that your divorce decree will split loans up the way you expect. It’s crucial to take steps to protect yourself from future financial troubles.
Protect Your Credit
There are two ways to keep your credit safe after divorce.1 Discuss these strategies with your attorney before taking any action:
- Get your name off the loan (by refinancing or having your name removed).
- Arrange to pay the lender in full.
Removing Yourself From Loans
It’s best to separate yourself from shared loans that your ex is supposed to repay. Even if you trust the other person completely, they could die or become disabled temporarily, placing the debt back on your shoulders (although life and disability insurance that you own could solve that problem).
Most lenders will not simply take your name off a loan after divorce. It’s possible, and it never hurts to ask, but don’t get your hopes up. The loan was approved counting on both of your incomes and looking at both of your credit histories.
In fact, it might have been your credit that expedited the loan approval, which would make lenders even less inclined to let you off the hook. If the lender does consider this possibility, they will probably need to review the remaining borrower’s credit and income before removing your name.
Get a New Loan
The most straightforward approach is to pay off any loans in both of your names and replace them with loans in one person’s name. That typically means refinancing your existing loans. For example, you’d get a new car loan or mortgage, and use the funds from that loan to pay off your old loan.
Unfortunately, the person responsible for the debt must apply—and get approved—on their own. If they don’t have sufficient income and credit, the application will be denied. In those cases, the borrower might be able to pledge additional collateral (for example, using the equity in the home to pay off an auto loan).
Another option is to sell whatever you owe money on, such as your home or vehicles (with your attorney’s input and approval, of course). Split the proceeds and part ways. It may not be the ideal time to sell, it might be disruptive for children, and it may not be your first choice, but it makes for a clean getaway.
If your assets have decreased in value, you may be forced to sell for less than you owe. Upside down home loans and auto loans may require you to come up with money (instead of collecting money at the time of sale), but you’ll be able to put the past behind you. Accepting a loss today may help you avoid headaches and financial burdens down the road, or it may just be a price you have to pay to move on.
Don’t Assume Anything
The most important thing to do during a divorce is to manage your debts proactively and never just assume they’re being paid off. You need to keep an eye on loans as long as your name is attached to them, recognizing that loans may be around for many years after your divorce.
Make sure to devise a way of meticulously keeping track of loans after your divorce. Obtain online access to accounts, and make sure lenders have up-to-date contact information so they can send you important mail (whether it’s your new residence, a Post Office box, or another arrangement).
If necessary, you can bring legal action against a non-paying ex-spouse—but the alternatives above are probably better. For starters, you don’t want to spend more time or money to navigate legal issues, and if you’re the one paying off debts, it’s often because your ex can’t afford to do so. In that case, legal action won’t benefit you much anyway. Besides, most of us would rather avoid legal proceedings if there’s any other way to reach an acceptable resolution.
What Should You Do With Joint Credit Cards When You Get a Divorce
The goal of divorce proceedings is to allow for the division of assets and debts between the two ex-spouses so that they can each disentangle from one another’s financial lives. With assets, that’s often relatively simple, because the two ex-spouses can equally divide financial assets like cash or investments. The couple can agree that one ex-spouse will get a personal residence in exchange for the other getting more money, or they can agree to sell hard-to-divide assets and split the cash proceeds.
With debt, however, things are more complicated. Lenders won’t just agree to let one ex-spouse off the hook on a joint debt because that would reduce the chances they’ll be repaid. That leaves one ex-spouse vulnerable to the bad actions of the other.
In particular, the following things can happen:
- If the joint card remains open after divorce, then your ex-spouse can run up the balance, and you’ll still be jointly responsible for it.
- If your ex-spouse declares bankruptcy, then the card company can require you to repay the full balance — and your credit history will bear the full brunt of the bankruptcy filing even though you weren’t the one to file.
Moreover, even if your divorce decree specifically talks about what’s supposed to happen with your joint card debt, that decree only applies to you and your ex-spouse. If your ex doesn’t live up to their side of the bargain, then the card issuer doesn’t have to deal with the consequences. They can simply require you to pay — leaving you to go back to the divorce court to try to collect from your ex directly.
This is why the ideal solution in divorce is to eliminate all joint debt and close any remaining joint credit cards. That way, each ex-spouse can open individual credit card accounts if they wish and make their own decisions going forward about whether they want to incur any additional debt.
However, that solution is possible only if there are enough assets to pay down that debt. Many couples don’t have enough joint savings to pay down their credit cards entirely, and following a divorce, it’s possible that ex-spouses won’t have good enough credit histories on their own to be able to replace joint credit cards with individual cards accounts.
In that case, the best alternative is to try to minimize the amount of ongoing joint card debt while being as upfront as possible with your card issuer. Some issuers will allow you to take your name off a joint account if your ex-spouse’s credit history is good enough for him or her to qualify for the card alone.
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Another alternative is to use balance transfers to get the outstanding balances on joint credit cards transferred to new cards held in each ex-spouse’s individual name. Because the new accounts won’t be joint, the transferred amount will be the liability of each individual ex-spouse. As long as the joint card is paid down by the transfers and then closed, this will result in a separation of the two ex-spouses’ debts.
Divorce is usually full of red tape and unpleasant legal proceedings, and figuring out how to split up debt isn’t going to make the process any more enjoyable. Take the necessary steps early in your divorce so that your credit score is not impacted. Pay off as much joint debt as possible, get your name taken off of joint loans and separate your assets. Doing so will prevent a lot of financial problems that could end up plaguing you post-divorce if you ignore them.