Going through a divorce often causes a person to take a good look around and “take inventory” of their life, but often forget the implications of the divorce and credit.
Many married couples or life partners apply for credit cards, auto loans, and mortgages jointly. One aspect of understanding how to build credit, means knowing how divorce can complicate your credit situation.
If all of your personal credit was kept separate during your marriage, then you will not be impacted by your former spouse’s credit behavior at any time before, during, and after your marriage. However, if your spouse was added to your accounts as an authorized user or joint holder of a credit card, this can spell trouble with respect to divorce and credit.
When opening joint accounts, both you and your former spouse are jointly responsible for the repayment of the debt. A relevant term here is ‘Jointly and Severally Liable”. In plain english this means the creditor does not care if you and your partner agreed to pay 50/50, or if you had an agreement for some other shared liability. They can collect 100% of it from either of you, and then its your problem to work out who owes each other what. To illustrate, lets say a Husband and Wife divorce leaving a $10,000 debt on a credit card. The card holder decides to sue and obtain a Judgment for the debt. This Judgment eventually gets attached to the title of the Husbands house. He goes to sell his home and a Title Search reveals the Judgments existence. The husband would not have the option to pay 50% of the balance owed, and then ask them to go after his ex wife for the difference. They were Jointly and Severally Liable. Both were responsible for 100% of the debt individually.
This also means your ex-spouse’s late payments and collection notices could potentially show up on your credit report after the divorce if you have not split the accounts. The same would hold true for medical debts incurred by the former spouse for services administered to children you had together. There are many areas that can come back to bite you in the keester.
Removing a co-borrower is not as simple as removing an authorized user. Because of this, often the best decision is to cancel the cards rather than risk the possibility of their poor choices coming back to haunt you.
Certain credit card companies may require a written notice to cancel an account. With respect to divorce and credit it is in your best interests to do this as soon as possible. Your ex-spouse may have a difficult time adjusting to reduced income, and in a pinch decide to utilize available credit. Even if your ex is not being malicious, and fully intends to pay back the debt, this could harm your credit score by causing your credit to debt ratio (the balance divided by the credit card limit) on jointly held credit cards to increase. The amount of your available credit that you use, should never exceed 30% to maintain optimal credit scores.
Dealing with a house in a divorce also presents its own range of issues. Often I hear from one spouse that the other “wants their name off title”. This is a commonly misunderstood concept. Title is ONLY an indicator of ownership. Removing someone from Title, does not remove their legal responsibility to pay a debt that they agreed to pay. Often couples mistakenly record a Quit Claim Deed, erroneously thinking it will remove ones name from the loan. This is not the case. Only refinancing can accomplish this.
Having said that, removing them from title is ALSO a good idea. Nothing would be more frustrating than having a lawsuit aimed at them take the house to satisfy their debt.
If you are separated, it would be wise to prepare yourself by taking a few precautionary steps, especially if you think you are heading toward divorce. Obtain your credit report and assess your financial situation, take note of all existing credit accounts. Maintain copies of them in a safe place. If you have some joint accounts, discuss with your spouse who will assume payments for which credit accounts. If you are still on peaceful terms with your spouse, have a frank discussion about divorce and credit, and how you can both protect yourselves. Speak with an attorney, and create a plan to keep your credit protected and your payments on time.
Additionally, to avoid further disaster when dealing with divorce and credit, contact all credit bureaus to ensure that your address information is updated.
