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Getting a Divorce? Here’s How to Protect Your Credit

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X_Bill_Ohl_CCFlickrGoing through a divorce is a painful experience on many levels. Adding to the stress are the many important decisions you need to make that will have both short- and long-term impacts.  If you are planning to divorce or have finalized a divorce, decisions regarding personal finances—including your credit—are extremely important and need to be addressed with care and rational thought.

With most marriages, it is likely that you have merged most, if not all, of your finances and have joint credit.  With credit, it is important to understand that you are contractually obligated to make the payments for any loan or line of credit you have—whether you’re the sole account-holder, or if you share it with your spouse.

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A divorce dissolves the marriage, but does not legally dissolve your shared credit obligations. I frequently get emails from people who are confused as they are getting calls from collectors about late payments on credit obligations that they “agreed” would be the responsibility of the ex-spouse.  Or their spouse has substantially run up balances on credit cards before the divorce is finalized, and they are shocked to realize they are responsible for that debt.

You need to take proper actions and sever all credit ties with your ex-spouse, in fact you should start the process as soon as you feel separation is likely.

  • Check your credit report — Understand which credit accounts you are jointly responsible for with your spouse (mortgage, car loans, credit cards, etc.).  Note, your credit report is based on your individual information (even if you are married) and will show credit obligations that are joint as well as individual to you and not your spouse.  A student loan or a credit card you applied for individually for example, or credit you obtained before you married.
  • Dissolve All Joint Accounts – If possible, you should pay off any existing balances and close the accounts. Check your credit report thereafter to make sure this has been completed and is being reported accurately. If that is not feasible, you should contact each lender and request that they change the credit contract so that only you or your ex-spouse is made responsible for the debt.  Should the lender not agree to do so (for example, they determine that neither you or your ex-spouse qualifies to repay the debt alone), then be sure you or your ex-spouse continue to make the payments on any open, joint accounts. Failing to do so will likely hurt both of your credit histories because the late payments will show up in both credit reports.
  • Establish Credit in Your Name – If you find that all your credit is joint with your spouse, it may be prudent to apply for credit (a credit card for example) individually before you dissolve all your joint accounts.  Generally speaking, your likelihood of getting approved will be greater if you have existing credit where you are showing a good payment history.  Note: A lender can’t discriminate against your application for credit if you are divorced.
  • Document Everything — Make sure that all of your financial arrangements and agreements are documented.

While the public record of a divorce is not considered by credit scores or by lenders when evaluating applications for credit, the outcome can have ramifications on your credit.  Taking these steps if you are considering divorce (or have divorced) can help reduce potentially harmful effects on your credit rating.

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Image: Bill Ohl, via Flickr.com

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