Divorce Can Mean Disaster for Your Credit
One of the biggest challenges facing couples about to divorce is separating their joint financial obligations. While this project is foremost in the minds of most couples, few consider the possible impact of that separation on their respective credit histories and credit scores. More importantly, many people believe a judge's order for one person to pay a specific debt means that the other person is relieved of the obligations. This thinking can spell disaster unless your divorce plan also includes a plan for separating your credit history.
You Are Responsible For Joint Debts, After Divorce.
Husbands and wives each have their own distinct credit when they enter a marriage. They continue to maintain these separate histories even after marriage, and through a divorce. While each spouse has their own history, both parties in a marriage are legally and financially bound to any joint debts that they enter into during the marriage. These joint debts typically include home and car loans, as well as household credit cards. These joint debts arise because each spouse has expressly agreed to pay the debt. While many couples have credit accounts where one spouse is an authorized user, authorized users are not responsible for paying of the account. Rather, the obligation to pay only arises when the card holder agrees to pay.
As to any joint accounts, both spouses are responsible for those debts. And that responsibility continues on even after the marriage is dissolved through the divorce process. This means that the credit history of any joint account will also continue after the divorce, even if a judge order one of the spouses to pay the debt. So if you have not discharged all of your joint debt by the time your divorce is final, your credit history will remain tied up with your former spouse, even after your divorce.
Collection of Individual Debt, After Divorce
Even if you have no responsibility for a debt under your final divorce settlement agreement, creditors may begin collection activity or adverse credit reporting against you if you opened the account with your spouse. While attempting to enforce a debt against a party who is not responsible is illegal, many debt collectors will attempt to do so in hopes that the parties cannot remember whether they agreed to pay the date. Additionally, If your former spouse declares bankruptcy, you may be left as the only responsible party to the joint marital debts and be required to pay off the entire amount.
To prevent these things from happening, family attorneys and people anticipating divorse should engage in a proactive effort to address these potential issues before and throughout the divorce process. Addressing these issues early in the divorce process can often result in better outcomes for both parties.
Six Ways To Plan Ahead And Prevent Credit Damage To Your Credit
While it is impossible to predict what your future ex-spouse may do after the divorce is finalized, there are things that you can do with the help of your family law attorney to help prevent these issues from happening.
- Set up a file for debt and credit reporting matters. These files should include copies of credit reports for both you and your spouse. These documents will help establish a “baseline” of what your credit looks like before the divorce and can help with proving damage if your spouse takes action to harm it. These reports will also show which accounts are held jointly and which ones are the responsibility of individual spouse.
- Identify all outstanding credit obligations of each spouse as well as the joint marital accounts. This will allow you to determine which account hold the possibility of harming your credit after the divorce. Also, knowing which accounts belong to you will insulate you from from being cheated into paying debts that you do not actually owe.
- When you are certain that your are going to divorce, contact creditors on all marital accounts and make sure both you and your spouse agree to stop new charges on these accounts. Make this request in writing and don't forget to request a written confirmation of closure from each creditor.
- Once the divorce is under way, your family law attorney should arrange with the other side to close and discharge any joint account. Joint debts can often be refinanced and transferred to only one spouse's name, consistent with the responsibilities assigned in the divorce judgment. There may be more than one way to accomplish this and your family law attorney should be able to help you achieve a desirable outcome if you take this approach. By closing any joint accounts -- including mortgages and car loans -- you can be sure that the financial actions of your former spouse after the divorce will not follow you.
- In the event that you are not able to pay off all the joint debt from your marriage, have your family law attorney negotiate terms that include remedies for harms by your former spouse. Your attorney should be able to help you include protections in your divorce settlement so your former spouse will have to compensate you for any harm or credit damage in the event that your former spouse fails to pay for their share of debts or incurs new debt in your name.
- Continue to monitor all your accounts through your credit report. Your former spouse likely had access to that account information and could make purchases on the account. Once a debt goes delinquent, you lose out on many options in terms of fixing these adverse credit items. The best way to avoid this is to be proactive. Ask that your creditors issue new account numbers for any open accounts and monitor your credit. Doing so allows you to maintain your options and prevent serious credit damage from occurring.
Following these steps will help reduce the chances of having credit harm from your divorce. If you're experiencing debt-related problems stemming from your divorce, we may be able to help.
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