Money matters are often noted as being a cause of marital woes, but financial issues can continue to weigh you down during and after divorce if you don't know what steps to take. It's no secret that divorce can be hard on the credit score, and it brings with it a change in expenses and income that can be difficult to overcome. According to Credit Donkey, 15 percent of couples choose to remain separated but legally married long-term — 10 years or more — because of money concerns.
In this video, Attorney Judith L. Poller explains Why Traditional Divorce Is So Expensive?
Finances don't have to be a complete obstacle to your divorce, and taking advantage of online resources helps you get through many of the processes in affordable ways. Protecting your credit is critical, though, because you might need to rely on your FICO score post-divorce when seeking employment, a loan for a car or home or a personal credit card.
Divorce Orders Don't Relieve You of Debt
One misconception that gets people into credit trouble after a divorce is that they believe a court order automatically removes their obligation to pay a debt. Even if divorce orders require your ex to pay 100 percent of the mortgage, credit card balance or monthly car payment, if you co-signed for the original debt, you still may be responsible for ensuring it gets paid.
When a spouse fails to pay the debt, the credit ramifications could impact you both, so it's important to stay informed about all accounts with your name on them and leverage all the financial and legal tools at your disposal to ensure payments are current or the account ownership is modified.
Common Credit and Debt Challenges During and After Divorce
It's not always as easy as keeping up with your financial facts, though. Divorce can bring credit and debt challenges — even for couples who were financially stable beforehand. Some common money-related obstacles you can face after you split up include:
- Reduced income: If you previously relied on the other person's income — or on joint income — suddenly finding yourself alone in generating money to support yourself or the household can be stressful.
- Increased expenses: Even when one person pays the other support, the same money must go further post-divorce; two people who previously shared the expenses for a single household are now generating expenses for two separate households.
- Joint debts: Splitting up joint debts can be difficult, as it's not simply a matter of deciding who is going to pay what. Unless you go through refinancing or modification processes, your name might be legally tied to the obligation and creditors can still attempt to collect unpaid balances from you.
- Identity theft: After years of marriage, it's likely your spouse knows enough about you to obtain credit using your personal information, and keeping joint accounts open can increase the likelihood that a bitter or in-need spouse might use such tactics.
Steps to Protect Your Credit
When possible, the best way to protect your credit is to work closely with your ex to ensure all debts are properly split, paid or modified. If the other person isn't cooperative with these efforts, you can still take steps to protect your credit as much as possible.
First, make sure all the debts are appropriately split and that agreements about who will pay each debt are recorded in court documents. If you can't get your name off an account and your ex doesn't pay as ordered, this provides you with a legal course of action.
When possible, modify joint debts to remove your name from the account. Most creditors won't do this just to be nice — it behooves lenders to have more than one person to collect from. For credit card accounts, arrange to have the total balance due paid, and close the accounts completely. For mortgages, car loans or other secured debts, consider negotiating a solution that involves one person buying the other out. This means the debt is completely paid off or it is refinanced under one person's name.
Split Joint Accounts
Take the same actions with joint checking, savings, and investment accounts. It's easier to split asset accounts than it is to remove yourself from a credit account — assuming you can agree on how those assets will be split. Consider working with a financial adviser if you're splitting retirement or investment accounts that might come with penalties for early withdrawal; you might be able to save money by rolling part of the funds into personal IRA or investment accounts in your name.
Finally, change all your passwords and log-in credentials for any account that contains personal or financial information. This includes seemingly benign accounts such as your Netflix or Amazon accounts, which could house credit or debit card information. An ex with those log-ins could use them to access information about you or run up charges on your cards.
Rebuilding Credit After a Divorce
Many people take at least a little hit to their FICO score following divorce, even if it's only because of a new debt-to-income ratio. Tips for rebuilding or strengthening your score include:
- Opening your own checking and savings accounts
- Monitoring your credit reports using free credit report offers, ensuring you know when items are not paid and if someone else is using your information
- Opening credit accounts, such as a small-balance credit card, in your name to build a personal credit history; this is especially important if most financial items were previously in your spouse's name
- Avoiding the temptation to use credit as stress relief; if you can't afford it, it’s probably best not to buy it
Even if you think your situation is beyond some of these tips, you have legal options, including bankruptcy in extreme cases. No one should ever stay in a marriage simply because they feel trapped by finances. Instead, educate yourself with the help of our selection of online resources before making decisions that negatively effect your credit during and after divorce.
Go to this page about online divorce to learn more.