Credit problems are not uncommon during divorce and frequently arise because most people don’t realize that creditors are not legally bound to abide by a final decree of divorce. That is, a judge’s order does not override what is owed to a certain creditor and there are many potential problems if one spouse does not follow the court order.
Below are some tips you can share with your friend to help him or her understand what may keep divorce from ruining their credit. Before your friend takes any of these steps, however, make sure that closing accounts or paying off accounts isn’t taking away any property rights of the other spouse. Remind your friend to:
1. Close joint accounts. If possible, before your friend separates, he or she may want to close all joint credit accounts. Closing them before divorce proceedings will keep an angry spouse from using the account and running up charges that your friend may later be held responsible for. If money is owed on joint accounts both parties are responsible for paying it back — no matter what the divorce decree says.
2. Go from joint accounts to separate or individual accounts. Your friend may want to consider turning all credit cards, gas cards and any retail accounts into individual accounts. Doing this will keep her from having to re-establish credit in her own name after the divorce. It can also cut down on the amount of friction once the divorce process starts.
3. Settle with creditors. Offer to close the accounts by paying a smaller amount than is owed. If this is done, get a letter from the creditor that the account has been paid in full and a written promise that they will not file anything derogatory about the account to the credit reporting agencies. However this may create some taxes issues, so check with your tax advisor. Depending on the debt that your friend has, he or she may want to seek the advice of a bankruptcy attorney.
a. Read more about how to deal with debt.
4. Freeze accounts. If your friend is not able to pay off debt, creating a settlement agreement regarding the balance may be a good move. This will keep one spouse from being able to use the account but will also protect your friend in the long run. Once the divorce is final, the balance owed on the account can be transferred to the party the court holds responsible for the debt. If the responsible party does not pay the debt then your friend doesn’t have to worry about it affecting her credit score. Of course don’t freeze accounts that one spouse has to live off of, especially if there is a court order.
5. Contact your creditors. Your friend needs to let creditors know that he or she has filed for divorce. If your friend has a change of address, make sure the creditors know so bills from all joint accounts are delivered to the correct address.
a. Check out additional tips on avoiding financial ruin during divorce.
6. Make sure all bills are being paid. Divorce proceedings can take months and all it takes is one late payment to hurt a credit score. Even if your friend has to pay the minimum on accounts that will ultimately be the other spouse’s responsibility, it will be worth it.
7. Understanding How Larger Debts Work. Don’t expect a mortgage or vehicle lender to be willing to simply take one spouse’s name off the loan. As long as your friend’s name appears on the original contract, both parties are legally responsible for making payments regardless of who possesses the house.
Also keep in mind that signing a quit claim deed or having a spouse sign one does not dissolve either party’s obligation to pay the mortgage. When your friend signs a quit claim deed, he or she is signing away any legal rights to claim any equity in the home – not the responsibility to meet the payment obligations both parties originally agreed to. Many individuals have discovered the hard way that a quit claim deed does not protect them from credit damage when their ex-spouse defaults on the home loan they once shared.
Divorce can be extremely taxing on emotions as well as finances. Eventually, emotions will recover, but unless your friend takes the time now to prevent damage finances could continue to suffer for years. No matter how responsible your friend thinks the former spouse may be, extenuating circumstances could leave your friend on the hook for debts he didn’t know he had. The best advice to your friend is not to panic but make a comprehensive list of the debts owed from the marriage and how they are being paid. Keeping an eye on things now will prevent problems later.
Remember; everyone is allowed to request a free credit report, once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.
AnnualCreditReport.com is the official site to help consumers to obtain their free credit report.