After a struggle to keep a relationship together, some couples make the decision that a split is best for both parties. Even though each person may ultimately be better off, divorce can be emotionally and financially draining. Deciding how to split material possessions, dealing with custody issues, and impacts on social circles can derail your lifestyle. One area that may take a hit during divorce procedures is your credit. It is important to understand financial responsibilities, know how state law impacts your situation, and communicate openly during a divorce.
Individual Responsibility for Debt
One reason credit scores take a deep dive after divorce is that individuals do not understand their responsibilities. In most cases, a creditor can hold you responsible for any joint debt, regardless of what you and your spouse agree to. In one case, the husband kept the home and agreed to make mortgage payments. Several years later, he entered into bankruptcy and the home went into foreclosure. Even though the wife had not been involved in the situation for several years, her name was still on the mortgage and the company attempted to seek payment from her.
It is essential that you understand all joint debts and take action to remove your name from any account that will be handled by your spouse. It may seem like a friendly gesture to allow the other person to take over payments, but this can lead to increased heartache in the future. Here are some actions you should consider when separating marriage finances:
Close joint credit card accounts. Leaving an open card in both names can result in payment disagreements and a vengeful spouse could even wreck your credit by making large purchases and not paying for them. Sell personal property like vehicles and real estate and split the profits. If there are no profits, split the loss. It is better to eschew financial ties, even if it costs a bit of money. Offer to buy out the other person or refinance a loan in order to keep a home or car, or ask the other person to do the same.
Understanding State Laws
Each state has its own laws regarding divorce and debt. One area where you might encounter surprises is with regard to debt used to cover marital necessities. If one party can prove that credit was used to provide food, shelter, education or other items deemed “necessities,” the rule about who is responsible for the debt may have little to do with the names on the account. Traditionally, the husband assumed responsibility for these debts after a divorce, and in some states, that is still the case. Make sure you understand what you are legally responsible for so you can make plans to deal with financial issues after divorce.
Avoid Petty Action Through Communication
Even in a bitter divorce, communication is essential for resolution. This is especially true when it comes to finances. Have a calm discussion about who will take care of what accounts. If necessary, use a third party mediator to reduce arguments and increase the likelihood of a fair split of debts. Once you agree to a certain course, take responsibility for your actions and do your best to make payments.
Even with knowledge and communication, you may find yourself with a reduced credit score following a divorce. Even if both parties act reasonably and responsibly, splitting your income and shifting accounts around suddenly can cause the credit agencies to lower your score. If you find yourself in this position, here are some tips for rescuing your FICO score.
- Make payments on time for all accounts still open in your name.
- Speak with representatives at your local bank about opening a line of credit, if possible.
- Research low-limit credit card options, but do not complete every offer. Numerous credit hits on your report will drive your score down even more. Open a single new card and pay it off each month.
A divorce does not have to derail your credit for life. Just as it will take time to heal emotionally and get your life in order, you can bring your credit back to top shape with careful planning. Sometimes, it will only take a few months, as long as you are prepared ahead of time.