Protecting Your Credit During a Divorce

So you’re getting divorced…I’m either sorry to hear that, or CONGRATULATIONS! Although divorce may put an end to the life you once shared with your former spouse, the debt you shared together is typically not so easy to leave behind. In fact, unless you plan very carefully to protect yourself during a divorce, your credit could take a severe hit during the process.

How Divorce Hurts Credit

The act of filing for divorce will not hurt your credit. Marital status does not appear on your credit reports and you do not share joint credit reports with your ex-spouse. As a result, divorce itself will have no impact whatsoever, negative or positive, on your credit reports or scores.

Yet although you do not share joint credit reports with your ex, you may share joint liabilities. Liabilities/joint accounts generally show up on both your personal credit reports and the credit reports belonging to your ex. Unfortunately, it is these joint accounts which can often bring about the credit destruction.

When you get divorced a judge will issue an order, known as a divorce decree, which will divvy up marital assets and liabilities. This decree outlines which party will make payments for joint credit obligations established during your marriage. And while this process is all very official, your creditors do not care about your divorce decrees and they are not a party to the agreement so they are not bound by the court’s order.

The fact that a judge has ordered your ex to pay a jointly acquired debt does not mean that a creditor is going to release you from your personal responsibility. Far from it. The original agreement you both made with that creditor is going to trump your divorce decree.

If your ex makes late payments on a joint credit obligation, those late payments will likely show up on your credit reports. If your ex defaults on a joint debt and it is turned over to a collection agency, that collection account will probably be added to your reports as well. You might be able to sue your ex for damages, but that will not prevent your credit from being trashed in the meantime.

Protecting Yourself

There’s really no reason to ever apply for joint credit with your spouse, unless you need two incomes to qualify for the loan amount. And given that about half of all marriages fail, it is generally best to keep your credit obligations separate. However, if that ship has already sailed there are still a number of ways to avoid credit damage during a divorce, or to at least soften the blow.

1. Close Joint Credit Cards

Closing a credit card account is usually a bad idea. However, special rules may apply during a divorce. Sometimes protecting yourself from potential problems is more important than the comparatively smaller credit issues caused by closing a credit card.

Keep in mind, if there are outstanding balances on any of those jointly opened credit cards the monthly payments will still need to be made on time. If they are not paid on time then the credit scores of both parties will likely suffer, regardless of who was assigned the debt in the divorce decree. Closing the account prevents any further use of the card by the non-paying ex-spouse.

2. Refinance

A great way to protect your credit during a divorce is to refinance joint debts into individual debts. That joint credit card debt mentioned above? If it was assigned to your ex then he/she could take out an installment loan to pay off the debt or perhaps transfer the balance onto a new, individual credit card account.

Is your ex going to keep a vehicle which is currently financed by a joint auto loan? Asking your ex to refinance the loan into an individual account will protect your credit. If you are willing to refinance the debts for which you are responsible into individual accounts then your ex might be willing to do the same.

3. Bankruptcy

Sometimes your ex does not care about how your credit is impacted through your divorce. He or she might even relish the idea of causing you additional pain. Imagine that.

If you are going through a nasty divorce and you simply cannot afford to maintain all of your joint credit obligations alone, sometimes bankruptcy is the best way to protect yourself. Bankruptcy might not save you from credit damage, but it could provide you with legal protection from your creditors. And remember, if you file bankruptcy it does NOT eliminate the debt. It just prevents the creditors from attempting to collect them from you. They can still go after your ex-spouse.