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Ask the Expert: How Can I Protect My Credit After a Divorce?

We asked our Facebook fans and Twitter followers to share their most pressing personal finance questions. Now, John Ulzheimer, Credit Expert for Credit Sesame, weighs-in.

Q: During my marriage, my husband and I co-signed to purchase a car. Now that we are divorced, how can I protect my credit if he allows the car to be repossessed?

This is a very common concern for couples that are going through a divorce. Unfortunately there isn’t an easy solution when dealing with joint accounts, whether they’re loans or credit cards. Divorce settlements and decrees do not remove joint parties from their obligations to pay back loans and credit cards on which they are liable.

If you and your ex-spouse co-signed on an auto loan, a mortgage, a credit card or any other credit related obligation, both of you are still responsible for payments despite what you agreed to during your divorce. And, even though you may have an agreement with your ex-spouse for payment responsibility, the lender still views you both as liable. The lender is not a party to your divorce settlement so they will not honor any agreements you make with your ex-spouse.

If your ex-spouse misses payments on a car loan (or any other joint account) then those late payments will show up on both your credit reports and his. If he stops making payments altogether, and the account goes seriously delinquent or even into default, that too will be reflected on both of your credit reports. When the creditors begin their aggressive collection processes—and they will—they will pursue both of you for payment.

In the case of an auto loan, the car will likely be repossessed after a few months of non-payment. The record of the repossession will show up on both your credit reports and his. Once the car has been repossessed the lender will likely sell it at auction and apply the proceeds to your auto loan balance. It won’t be enough to cover what you owe; it never is.

After the auction funds have been applied you’ll likely end up with what’s referred to as a “deficiency balance.” That’s the amount of the loan that’s still unpaid. You and your ex-spouse will be liable for that amount and they can come after you for payment.

How to Avoid The Problems With Post Marital Joint Debts

Sell it or Pay it Off

One way of avoiding the issues with joint debts is to get rid of the debt. You can either sell the car or pay it off. By exhausting the debt you take the lender out of the equation and ensure that there are no future credit reporting problems with the loan.

Refinance Into One Name

When you refinance a loan from a joint account to an individual account the lender no longer holds both parties liable. Of course, if your ex-spouse is taking on the debt then he’s going to have to be willing to refinance the loan into his name. And, he’s going to have to be able to qualify for the loan, which means his credit scores and income will be taken into consideration.

Make the Payments

The lender will gladly accept payments on the loan from either spouse, regardless of the marital status. If your ex-husband isn’t or can’t make the payments you can step in and start sending checks to the lender. Of course, this isn’t a very attractive option because you’d be paying on a car loan for a car that he’s using and with which the court ordered him to make the payments.

File Bankruptcy

This is not a realistic option for just one loan, but if you have many joint debts that aren’t being paid then bankruptcy might be an option. You can file an individual bankruptcy, which would protect you from your creditors. The creditors would still be able to pursue your ex-spouse for payment unless he filed for bankruptcy protection as well.

You’ve probably already realized that none of these options are “good” options. They’re all just varying degrees of bad or inconvenient.  This is the very reason I advise couple to never co-mingle their debts. There’s no reason to apply jointly or co-sign for credit cards or even auto loans. The only debt you may have to co-sign for is a mortgage loan because you may need two incomes to qualify.

While nobody goes into a marriage expecting it to fail, I think you have to be realistic. Half of all marriages end in divorce. And, it’s much easier to divorce your spouse than it is to divorce your creditors.

If you have a credit related question that you’d like me to answer please send them to @CreditSesame on Twitter.

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