When a marriage ends in divorce, the lives of those involved are changed forever. During this time of upheaval, one thing that shouldn't change is the credit status you've worked so hard to acheive.
Unfortunately, for many the experience is the exact opposite. Unfulfilled promises to pay bills, maxing out credit cards and a breakdown in communication frequently leads to the annihilation of at least one spouse's credit and often negatively impacts both parties. It is important to understand that assignment of debt according to the Divorce Decree does not override the original agreement with the creditor. For instance, if the Decree states that one party is to pay the balance on a joint charge card, and that party doesn't make the payment, the creditor still has the right to collect the debt in full from the other party.
The good news is that by taking a proactive approach and creating a specific plan, you can ensure that "starting over" doesn't also mean rebuilding your credit.
There are two primary types of credit accounts and each is handled differently during a divorce. The first type is an unsecured account, typically charge cards. The second type is a secured account which means the liability is secured by or "attached" to an asset.
Create a spreadsheet and list all open, joint accounts. An account may be "open" with no balance. List the creditor name, contact number, the account number, account type (secured or unsecured), account balance and the minimum monthly payment.
For all unsecured accounts, be prepared to act quickly. Any joint accounts with a zero balance should be closed immediately. For joint accounts which carry a balance, your best option is to have them frozen. This will ensure that no future charges can be made to the account. When an account is frozen it is frozen for both parties. If you do not have any credit cards solely in your name, it is recommended that you obtain one before freezing joint accounts. Balances on the joint accounts should then be transferred to individual accounts per your settlement agreement so each party will have individual responsibility for payment. An important note: closing long-standing credit accounts - even those with zero balances - will lower your credit score (see Credit Scores for more information) but this may be a better option than the risk of payments outside your control.
For secured accounts, the recipient of the asset should refinance the joint account to their own name removing it from a joint liability. This only works, however, if the recipient can qualify for the monthly payments on their own. The second option is to sell the asset and payoff the debt removing the liability from both parties. The last option is to keep your name on the loan. If you keep your name on the loan (a mortgage loan, for instance), make sure your name also remains on the title. The worse case scenario is to be legally responsible for a debt on an asset to which you have no legal claim. This is the most risky if you are not the one responsible for making the payment and your credit rating is truly vulnerable. Ensuring payment on a debt which carries your name is paramount when it comes to preserving your good credit. Keep in mind that one 30-day late payment can drop your credit score as much as 75 points.
If you are considering a post-divorce home purchase, it is important to enlist the aid of a highly qualified mortgage professional prior to finalizing the Divorce Decree in order to understand the impact of your debt agreements on your future mortgage financing. For instance, if you remain obligated on the mortgage for the current family home, it will be treated as your personal debt (regardless of who is awarded the payment per the Divorce Decree) until your ex-spouse can provide proof that he/she has made the payment entirely on their own for 6 - 12 months. Additionally, if the payment on a joint charge card was awarded to your ex-spouse on the Divorce Decree - and late payments appear on the credit report - the debt will be treated as yours because the creditor can legally come to you for payment should your ex-spouse get behind or default.
It is possible to purchase a new home prior to the Divorce settlement. You could purchase a home and take title as Married, Separate Estate. Your income alone (excluding your spouse) and all debts (individual and joint) are used when qualifying you for the new mortgage.
Divorce is difficult for everyone involved. By taking these steps, you can ensure that your credit remains intact.