Protect your Credit in a Divorce

Divorces can be expensive, emotionally taxing, stressful, unpleasant and derail the best of plans.  Your credit worthiness can also be negatively impacted in a divorce.

Sometimes, before a divorce begins, or even one of the reasons a divorce occurs, is the spending habits of one of the parties to the marriage or the failure of one of the parties to pay bills in a timely or responsible manner.  But sometimes the parties have jointly built a good credit score and have created the ability to obtain credit easily and at low rates.  The divorce can, but does not have to, interfere with that asset.

Creditors do not care what a divorce decree says, what a Marital Settlement Agreement obligates your spouse or former spouse to do or how you have to divide debts.  If a debt is in joint names or on a joint account, both spouses are responsible to pay it back and to pay it back on time.  The credit worthiness of each of the spouses will be impacted if payments are not made in full and on time even if one of the spouses, and not the other, is obligated under the terms of the Marital Settlement Agreement, to make the payments.  You made your contractual deal with your creditors, such as credit card companies or banks which lent you money, before the divorce.  Creditors cannot be unilaterally forced to amend or modify the terms of the agreement, such as to remove one of the parties as an obligor, just because of the divorce.  While they can be contacted and asked to agree with a modification, what is in it for them?

The best situation in a divorce is not to have any joint credit which continues after the marriage to be paid by your former spouse.  That is, at the time of divorce or as part of the agreement, the party getting an asset or responsibility for a bill should pay it off in full or refinance it only in his or her name removing his or her ability to damage your credit.  This is not always possible.  Today, according to economists, twenty to twenty five percent of the residential properties in America are under water or more is owed on them than the value of the house.  The house just cannot be sold and the mortgage paid off.  Either both or one of the parties must add money to the net sale price to pay off the mortgage or the mortgage must be paid over time.  A bank normally will not lend more than the value of the house or discharge one of the parties when there is no equity in the house.  The same may be true of credit cards or other debts which exceed what one of the parties to the marriage is able to borrow or immediately pay.

If, because you have no choice, your spouse is going to be paying debts for which you are partially responsible or for which a creditor will hold you responsible, as part of a Marital Settlement Agreement, your first concern should be how you will know whether the payments are or are not being made.  The creditor will not contact you when the payments are made.  They will only contact you when the payments are behind schedule or when they are ready to take some collection action.  Damage will have already have occurred to your credit rating if you are, in part or in whole, responsible for the debt.  First, your divorce attorney should warn you about the risks to your credit if your spouse is going to be paying future payments.  You must evaluate how likely it is that your spouse can and will make the payments on time and in full.

Some credit counseling agencies have indicated that most divorce attorneys do not talk to their clients about how to handle joint debt or the possibility of credit damage if your spouse does not timely make payment.  Can insurance, assignment of future income, refinance or sale of assets protect you?  If not, you may not have a choice but you should at least understand your risk.

The best approach is to close out joint accounts and refinance any loans which your spouse will be responsible for in the future but for which you are also responsible for to the creditor.  If this is not possible, at least you must make sure that no more credit can be taken out.  If the credit card cannot be closed because there is a balance, make sure that, as the credit card is paid back, the party responsible for the card cannot take more credit in joint names.  If there is a home equity loan, make sure no more can be drawn against the line of credit.

In order to decrease your chances of negative issues, you may wish to explore the idea of whether or not you can check payments on a mortgage or other debt online and require, in your Marital Settlement Agreement, that passwords to allow joint access to follow debt payments be shared.  This may not insure that payments are made but at least it will give you a method to determine if the payments are being made so you might take further action more quickly.

This may  not be a great solution but, if your credit is important enough to you, you may wish to include in your Marital Settlement Agreement your ability to pay debts which your spouse is not paying timely and to collect them back from that spouse, in the future, perhaps with costs of collection and interest.  You will certainly want to consider what impact your spouse or ex-spouse’s nonpayment has on other obligations you incur in the Agreement.

Another matter to determine is which debts you want to take on and which debts you want your spouse to take with the consideration of how much damage can be done to your credit if those accounts are not paid.

The best idea is to make sure that there is no joint credit at the end of a divorce.  In today’s economy, that is frequently not possible.  When not, while there is not always a solution to perfectly protect a party from his or her former spouse’s irresponsibility, at least it is a matter which must be considered and protected to the degree possible.