When planning for a divorce, don't forget about your credit

07.23.09
By John Ulzheimer

If you believe the national statistics, half of you who are reading this article will go through, or have already gone through, a divorce. And in the spirit of full disclosure, I have never been through a divorce so I speak from the position of curious observer versus that of participant. Having said that, I’ve spoken with and helped an immeasurable number of consumers who have seen their credit destroyed because of poor divorce preparation.

One of the steps in the divorce process is dividing assets and liabilities. Liabilities, in layman’s terms, are debts owed to others, including your lenders. And as is the case with most married couples, many of their debts are jointly held, meaning they are both equally liable for payment and non-payment.

The parties negotiate who will take over payments for certain items. The court formalizes these arrangements. The soon-to-be ex-spouses walk out of court under the assumption that the other will continue to make payments on the debt which each of them has been assigned. This is where the trouble begins.

While the court is certainly an ultimate authority, it does not, in most cases, order the lender to recognize its decisions to assign payment responsibilities. What this means is just because the court says that your ex-husband has to pay the Visa bill, the lender can’t come after you if he doesn’t. And any negative record of missing payments will show up on your credit reports just as if you two were still together.

You can complain about it until you’re blue in the face, but your lender isn’t doing anything improper by attempting to collect the debt from both spouses (if the account is held jointly). And they certainly are well within their rights to report the account to your and your ex-spouse’s creditors as being past due. And the worst news of all: Your credit scores will suffer the same way they would have suffered if the debts were not paid while you were still married.  

So the question now becomes the following: How should you best prepare your credit for a divorce? Joint home loans and auto loans are difficult to deal with because the lender will not simply let you off the hook even if you ask nicely and explain that a divorce is coming. The only way to dispose of your liability is to dispose of the debt – and that means selling the home and selling the car. Another alternative is to refinance either into your name or into your spouse’s name. This requires, however, that both parties are still cooperating and that one of you makes enough money to qualify for the loan individually, in which case the joint account would become an individual account.

Credit cards are easier to deal with because the amount of debt you owe on a credit card is generally lower than the amount of debt you owe on a car loan and a mortgage. Still, not addressing credit card debt can damage your credit scores just as much as an unpaid auto loan or mortgage. It’s in your best interest to pay off the debt, transfer it to another card that’s in one of your names only, and then close the account so new charges can’t be incurred. Closing an account is the lesser of many evils. Usually you wouldn’t want to do so since your credit scores may take a hit when you close an account. However, in a divorce scenario this option is often one of the surest ways to protect your credit.  

So there you have it: Difficult advice for an impossible situation. Both of you will benefit if you can accomplish these things before the divorce becomes contentious. After all, in your newly divorced life, you’ll need good credit to obtain new loans, new insurance, and perhaps even new employment.  

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One of the steps in the divorce process is dividing assets and liabilities.