When a couple divorces, they have to separate often substantial amounts of marital property, including items jointly held, whether an asset or a liability. The division of debt, in particular, can wreak havoc on a valuable asset – your credit rating. As described in this article in U.S. News, a newly divorced individual needs to take a variety of steps to either protect or restore a credit rating.
The most likely joint debts of a marriage will be a mortgage and credit cards. If the mortgage is taken out in both spouses’ names, each spouse is jointly and severally liable for the whole mortgage, meaning that the bank could come after you even if you did not get the mortgage responsibility. Likely you will have a hold harmless agreement that requires the other spouse to protect you and your interests in the event of a debt collection action, but that will not stop the credit rating agencies from docking your credit if the debt remains in collection. When this happens, what can you do?
The best remedy to free you from the mortgage is to require the other spouse to refinance the loan with only his or her name. In that way, you will no longer have a legal responsibility for the debt and it will not affect your credit. You also could consider putting the house on the market or seeking foreclosure if the former spouse continues to be irresponsible with the mortgage.
Credit cards in joint names are much easier to fix. If you have cards you principally used but still have both names, immediately remove your former spouse from the card or simply cancel the card to freeze the balance. If you have a joint card with debt assigned to the other spouse, you should also seek your former spouse’s cooperation in removing your name from the card and releasing you from that debt through the holding company. If the former spouse will not agree to do so, you can remove your name yourself and send a copy of your divorce judgment to the holding company showing the debt is solely the responsibility of the former spouse. You can also send the divorce judgment to the credit rating agencies to encourage them not to penalize you for this debt.
But what about debt you owe? You should stay on top of all of your credit card bills and not fall behind, and avoid large balances and high interest rates. If you used credit cards to finance expenses during the divorce, you need to prioritize paying off that debt before accruing new debt. You may need a different budget in the short term that emphasizes debt reduction, otherwise not only do you get into a big hole financially, your credit rating will drop significantly.
After divorce you want to monitor your credit regularly. Sign up with one of the reporting agencies so you can get a red flag alert immediately and respond to challenge any unauthorized expenses or docked points due to behavior of the former spouse. If you correct these with the reporting agencies right away, you will not see your credit rating affected.
Finally, how can you rebuild your credit after divorce? Be responsible with your money. Live within your means. Pay credit card bills on time and do not pull in high balances or too much overall debt. You might even want to engage a financial counselor to come up with a plan or give specific advice.
Remember that your ability to thrive financially after divorce turns in large part on your credit rating, from getting a credit card to securing a mortgage or a car loan.
If you have questions about credit rating after divorce, contact us – we can help.