Divorce and Credit

Divorce and CreditDivorce can be a painful process that takes its toll mentally and emotionally on both sides. When hard emotions are involved, reasoning takes second place. As a result, divorce can be very problematic with respect to credit reports and scores, especially with joint accounts. It’s not unheard of for people to ruin their spouse’s credit (including their own) just for revenge.

A common question amongst the would-be divorced is how divorce affects a person’s credit, and how to protect one’s credit during the process.

Although divorce has no direct effect on your credit history, credit worthiness or credit score (By law – marital status has no effect on credit), it can harm your credit indirectly in various ways. Here is what you need to understand and pay attention to when you’re separating or about to divorce.

Divorce Decree
The most common misconception regarding divorce and credit involves the divorce decree and how creditors refer to it. The most important thing to understand is that the divorce decree does not change your obligation to your creditors. In fact, creditors are not interested at all in your divorce decree. While the decree binds the former spouses, it does not bind the credit card company!

For example, let’s assume that the divorce decree orders one spouse to pay off a given debt that was obtained jointly. If the spouse obligated to pay that debt is late on payments of fails to pay off the debt altogether, that negative information will appear on both spouse’s credit reports. Furthermore, the creditor can seek collection from either party, regardless of what the decree says.

Mortgages and Home Equity Loans
If you and your spouse have bought a house together, both of you are most likely on the mortgage loan (even if only one of you makes the actual payments).

In many divorce settlements, one spouse continues to live in the house until the kids are grown. Regardless of who lives in the house and who pays the mortgage, your are both held responsible for paying off that mortgage, and payments information will show up on both of your credit reports. Obviously, this situation is problematic, to say the least.

The only way to avoid potential credit problems is to sell the house. It can either be sold to the spouse who remains to live in it (assuming he/she has the financial ability to qualify for a mortgage), or simply be sold to a third party and the proceeding divided between the former spouses according to the divorce decree.

If the house cannot be sold or refinanced because the side that remains to live in it doesn’t qualify for a mortgage, both spouses should be responsible and vigilant in keeping up with payment schedule.

Unfortunately, in many cases, judicial intervention is required when one spouse fails to make the mortgage payments.

Car Loans
As with mortgages, the best way to avoid potential credit problems is by selling the car or refinancing it in the name of the spouse that gets to keep it. The good news is that auto loans are typically easier to refinance than a mortgage because of the smaller amounts involved.

Once your name if off the title of the loan – you are no longer responsible for future payments.  Any future payment information related to that auto loan will not appear on your credit report.

Joint Accounts & Credit Card Accounts
Joint account appear on both spouse’s credit report. All joint accounts should be closed, and each spouse should open an individual account in his/her name only.

By law, creditors cannot close joint accounts because of a change in marital status. They can however do so at the request of either spouse. Creditors are not obliged to change joint accounts to individual accounts. In most cases, both spouses are required to reapply for credit on an individual basis and then, based on their credit worthiness, get approved or denied.

Once a joint account has been closed, it can no longer negatively affect your credit. Although closing credit account can have a small adverse affect on your credit, the risk involved in keeping joint credit accounts open is simply too big.

Accounts should be closed only after they are fully paid off and the balance is zero. Requests should be made via Certified Mail, Return Receipt Requested.  All confirmations that an account is closed with zero balance should be kept forever. See this helpful article for important tips on closing accounts.

Authorized User Accounts
As with joint account, authorized user accounts appear on both spouse’s credit report. If you are an authorized user in your spouse’s individual account, it is in your best interest to be removed from that account.

By law, creditors must remove authorized users at the request of either spouse. Requests should be made via Certified Mail, Return Receipt Requested.  All confirmations that you are removed should be kept forever.

Child Support
Child support payments are not reported to the credit bureaus (unless they go delinquent). While making or collecting timely monthly child support payments doesn’t affect your credit report and score, they may very well affect your chances of getting new credit and most likely affect the suggested terms. See Child Support & Credit Score for more information.

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