Credit and Divorce
If you have just gone through a divorce or are planning one, you may want to examine credit and divorce concerns attentively to prevent the predicament described above. In addition, understanding the various types of credit accounts acquired during a marriage can provide light on the potential advantages and disadvantages of each.
Does Divorce Affect Credit Scores? Your credit score may decline.
Divorce does not influence your credit score by itself. Unless you take the necessary safeguards, the divorce process, which sometimes involves joint credit accounts, may negatively impact your credit.
The divorce order defines who is liable for accounts opened during the marriage. This judgment does not, however, bind the lenders. This means that you may still be liable for an account bearing your name.
Types of Credit Accounts and Financial Obligation
There are two different sorts of credit accounts: individual and joint. You can also allow approved others to use your account when applying for credit.
The creditor takes your income, assets, and credit history into consideration. Regardless of your marital status, you are solely responsible for paying off the debt in your individual account. The account will appear on your credit report, as well as that of any “approved” users.
Nonetheless, if you reside in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), you and your spouse may be responsible for debts incurred during the marriage, and the individual debts of one spouse may be reflected on the credit report of the other.
If you are not employed outside the home, work part-time, or have a low-paying job, having an individual account could be detrimental. Because it may be difficult to provide a solid financial picture without your spouse’s salary.
Alternatively, if you start an account in your own name and are responsible, no one else’s actions (or nonpayment) can negatively impact your credit rating.
Considerations for a joint account include the income, financial assets, and credit history of both account holders. In a joint account, you and your spouse are jointly accountable for paying debts, regardless of who pays the bills. A creditor who reports the credit history of a joint account must include both parties’ names (if the account was opened after June 1, 1977).
A creditor accepting a loan or credit card may consider the combined financial resources of two applicants as evidence of their creditworthiness.
However, because two people jointly applied for the credit, both are liable for the debt. This is true even if a divorce ruling assigns each spouse distinct debt liabilities. On jointly-held accounts, ex-spouses who run up expenses and don’t pay them can harm their ex-partners’ credit histories.
Account titled “Users”
If you create a personal account, you can grant access to another individual. If you list your spouse as an authorized user, a creditor who reports your credit history to a credit bureau must also include your spouse’s name (if the account was opened after June 1, 1977). A creditor is also permitted to report the credit history of any other authorized user.
Frequently, user accounts are created for convenience. Students and housewives, who may not qualify for credit on their own, benefit from these loans. These individuals may use the account, but they are not contractually obligated to pay the bill.
What Happens to Your Credit If You Divorce?
If you are contemplating divorce or separation, pay close attention to the status of your credit accounts and the relationship between credit and divorce. If you keep joint accounts during this time, it is imperative that you make regular payments to protect your credit rating. As long as a joint account has an outstanding amount, you and your spouse are accountable for it.
Will a divorce save assets from creditors?
As noted previously, a judge’s divorce judgment does not apply to creditors. This means that creditors may pursue you for any missed payments or unpaid credit card balances. Additionally, they will submit your credit history to a credit bureau.
Should Debt and Credit Cards Be Paid Off Prior to Divorce?
Yes! If at all possible, it is preferable to pay off or decrease as much of your joint debt as possible prior to or as part of the divorce process. If that is not practicable, stop making new purchases with shared credit cards.
Preventing an Ex-Spouse From Ruining Their Credit During or After a Divorce
Divorce by itself can be quite hard. However, it is essential to consider the financial ramifications, especially in terms of credit scores. The following recommendations can assist you in maintaining good credit as you go in life.
Early closure of joint accounts
You might want to close any joint accounts or accounts where your ex-spouse was an authorized user. You might also ask the creditor to convert these accounts to individual accounts.
A creditor cannot automatically liquidate a joint account due to a change in marital status, but may do so at the request of one of the divorcing spouses. However, creditors are not required to convert joint accounts into individual accounts.
Instead, they may force you to reapply for credit individually and, based on your new application, grant or deny credit. To remove a spouse from an obligation on a mortgage, vehicle loan, or home equity loan, a lender will usually need refinancing.
2. Obtain Your Credit Score Through a Credit Reporting Agency
There is no better time to obtain a free annual credit report than when you are going through a divorce or have concerns about an ex-debt spouse’s repayment. Determine your debts, what has been reported, and whether your ex-spouse is behind on payments for joint accounts.
If you reside in a community property state, you must be aware of all of your ex-obligations spouse’s accrued during the marriage, even if your name was never on the loan or credit application. Any debt created during the marriage is regarded as jointly incurred by both parties.
3. Separate and Transfer Credit Card Obligation
Instead of simply announcing that one spouse will be responsible for paying off the credit card debt, actually divide the debt on shared credit cards and transfer it to the responsible spouse. Then, cancel the joint cards without delay.
4. Include a clause on indemnification in your divorce agreement
Consider inserting an indemnification language in your divorce agreement if just one spouse is to be accountable for a jointly-owned debt. This section specifies which spouse is responsible for the debt and makes it abundantly apparent that the other spouse is not liable.
You can sue your spouse if they refuse to pay a debt stated under their name in the indemnification agreement.
Obtain Expert Legal Assistance With Your Credit and Divorce Concerns
Your credit score is an essential component of your financial well-being. If you’re considering divorce, you’ll need to know who will be responsible for the majority of the debt after the marriage and how this could affect your credit history. However, you are not required to answer these questions on your own. A local divorce attorney will be able to alleviate your anxiety.