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

car-repossession

We asked our Facebook fans and Twitter followers to share their most pressing personal finance questions.  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? 

We get a lot of question along the lines of”how does divorce affect credit?” and how to protect it. 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.  Divorce settlements and decrees do not remove joint parties from their obligations to pay back loans and credit cards on which they are liable.

Whether  loans or credit cards, credit card debt and divorce go hand in hand.How is credit card debt split in divorce? 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 report cards 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.

Q. “John, I will be filing for divorce from my husband of 12 years in the next few months. Almost all of our liabilities are joint, meaning both of our names are on all of our accounts. Does divorce hurt your credit? I’ve heard that we’ll still be jointly liable for all of our accounts even after our divorce. Is that true? If so, how can I put myself in the best position possible so that I can protect my credit?”

Does divorce affect credit? No. But it is absolutely true that your divorce settlement will not change the fact that you’re jointly liable for credit with your ex-spouse. Lenders do not recognize divorce decrees and whatever you’ve agreed to with your ex-spouse won’t change the legal and binding agreements you have with your creditors. That means you and your ex-spouse will still be connected via your joint accounts. And if you or your ex-spouse default on joint obligations, both of your credit report cards will be damaged.

How to Avoid The Problems With Post Marital Joint Debts

Dealing with Joint Credit Cards

If you’ve ever read my credit improvement advice you know that I never, ever advocate closing credit card accounts because of the potential downside to your credit scores. The pre-divorce scenario is different and that’s exactly what I’m going to suggest. If you have joint credit card cards, you’re going to want to apply for a new card or new cards BEFORE you close the joint cards. Once you’ve established several accounts in your name, then close the joint cards.

Dealing with Joint Installment Loans

Installment loans (auto, mortgage) are trickier because the balance is normally much higher than your credit cards and in order to eliminate the debts, you may have to sell the asset. You won’t be able to simply ask the lender to remove your name from the account as a co-obligor. That won’t work because you’re asking the lender to be happy with half the number of potential payers.

You could refinance a loan from a joint account to an individual account so that 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.

If you are able to sell the house then you’ll eliminate the joint liability. The same applies with cars, but there’s an additional twist with auto loans. Normally when you finance a car you are upside down for the majority of the time you’re paying back the lender. So, if you do end up selling the car you may have to come out of pocket to cover any deficiency balance due to the lender. Of course, if you like the car or like the house, you could always refinance the loans in your name, assuming you make enough money to qualify for the loan amount.

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

Divorce and credit card debt, especially a lot of debt, is a messy combination. Bankruptcy is not a realistic option for just one loan, but if you have many joint debts that aren’t being paid then it 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.

I recognize that none of these options are perfect, but the alternatives are much worse. If your joint accounts survive the divorce process and your ex-spouse misses payments on the loans on which he has agreed to make payments, your credit reports and credit scores will suffer. And, if the loans go into default the creditors can pursue each of you with equal aggression for payment.

Credit Surprises

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. Let’s take a look at the other nasty credit surprises divorcing couples can encounter.

1. Your ex might not honor court-ordered financial obligations

The fact that your spouse is ordered to pay debts does not guarantee that he (or she) will do so. If an account bears your name, alone or jointly with your ex, you are legally responsible for the debt. The contract with the creditor is not altered by the divorce decree. If your spouse fails to pay the bill, your credit will suffer. If the account goes into arrears (a legal term that means overdue debt), your credit score isn’t the only thing at risk. You might also be vulnerable to lawsuits by the creditors owed money.

Have your name removed from all accounts that your spouse alone is responsible to pay. This may require that your spouse apply individually for a new account and transfer the old debt to it.

He or she may not be willing to do that, or may not qualify, so as long as your name is on a debt, keep a close eye on the payment history. Make the payments yourself if your ex is unable or unwilling to do so and you want to protect your credit.

2. Individual credit accounts are critical

Are you one of America’s 10.5 million stay-at-home moms (or one of the 2 million stay-at-home dads)? Be sure you have your own credit account. If you thought you couldn’t, the 2011 CARD Act made it next to impossible for non-working spouses to qualify for credit accounts on their own. Fortunately, rules changed in 2013, and now the creditor can consider shared income (your spouse’s, for example) when evaluating creditworthiness.

Here’s the pitfall of having only joint accounts. If all of your credit accounts are jointly owned and you close them when the relationship ends, the result could be that you are left with no credit score at all. (Here are a few tips on how to bring up your score.)

To have a FICO score, you need:

• At least one account that has been open for at least six months
• At least one undisputed account that has been updated by the creditor in the last six months (it can be the same account)
• No mention of “deceased” on your credit file

Closed accounts will still affect your score. If they were closed in good standing, they’ll remain on your credit report and factor into your score for ten years. If you satisfy the conditions above, you will continue to benefit from the age and payment history on the joint accounts until they age off.

Closed joint accounts that were in default will remain your credit report for seven years from the date the account became past due. If you satisfy the conditions for a credit score, it will reflect the negative marks until they age off your report.

If an account was closed in good standing but had late payments in the past, the late payments are removed after seven years and the account remains in your file for ten.

If you don’t have accounts in your name alone, get one. Here are Credit Sesame’s best recommendations for credit cards.

3. Expect to lose in divorce court

Assume the worst financial outcome (and be pleasantly surprised if things go in your favor). Sticking to a budget is an admirable goal for anyone, but it’s especially important for couples whose household is about to become two. Remember, overall costs always go up after divorce, not down.

Here’s a very common scenario: the breadwinning spouse is ordered to pay child and/or spousal support that amounts to a significant percentage of his (or her) income. The budget is especially tight if he supports more than one family.

Remember, court-ordered support is a financial obligation in addition to all of life’s standard expenses, resulting in a greater need for money and more chances to miss a payment. This ex can’t meet all of his financial obligations, and falls behind as a result. In as little as six months, late payments and account defaults absolutely destroy his credit rating, and negative credit consequences linger for years.

The strategy for overcoming this challenge is to anticipate higher expenses after divorce and keep your spending to a minimum to the extent you are able. If you have assets, consider selling or liquidating them if it will help you make a clean financial break from your ex.

4. Defaulting on court-ordered support is far worse than defaulting on other bills

All late and missed payments can hurt your credit, but falling behind on court-ordered support can be especially damaging.

While defaulting on your cell phone bill can lead to collections and credit score damage, defaulting on court-ordered support can lead to wage garnishment, property liens, asset seizures, interception of tax returns and unemployment or disability payments, passport seizure and negative credit reporting, among many other penalties.

If you are unable to keep up with court-ordered support, head straight to family court to ask for a modification before skipping any payments.

5. Without good documentation, you could lose big money

Many divorces turn nasty. Some spiteful partners deliberately rack up new debt on joint accounts or their partner’s accounts in order to cause financial harm. Some will open new accounts using the partner’s name and social security number.

Do you live in a community property state? You’re responsible for half of the debt acquired during the marriage, including accounts in your ex’s name alone and accounts you didn’t know about.

Make your separation legal by filing the required paperwork where you live. You need to document the date of the split. Also, close joint accounts and open individual accounts to which only you have access. Keep records of all account activity.

A judge might decide that your spouse is liable for debts incurred after the date you separate or file for divorce, and for illicit accounts and those you were unaware of. The more complete your paper trail, the better your chances.

Build a good credit score by following good old-fashioned rules

Your credit file is yours to keep, for better or worse. If you already had bad credit before you were married and the union lasted a few years or less, you still have bad credit (although time may have allowed it to improve a bit). Items age off your credit report in the time allowed by law (seven to ten years). Neither divorce nor marriage changes that fact.

Pay all bills on time, pay off collection accounts and don’t max out credit cards.

No one can protect your credit like you can. Take the initiative as soon as you are sure of the relationship’s demise. Don’t neglect your credit, and don’t rely on casual communication with your spouse or ex for the information you need to protect your financial well-being.

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Published July 2, 2013 Updated: April 20, 2016
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