The other week, I got an email that made me cringe.
The email was from a man had just been through a divorce. He explained that he lost 94 percent of everything when he and his wife divorced.
“She got the properties, and I got the mortgages.”
Per the terms of their divorce decree, his monthly spousal support check was to include the cost of the mortgages.
When I read that, I just knew what he was going to say next, and that’s when I cringed…
His ex-wife was cashing the checks, but she wasn’t paying the mortgages on time… the very same mortgages in his name.
This Happens All the Time
This situation is common, so if you ever go through a divorce, make sure you protect your credit.
In short, here’s my advice:
1. Refinance the mortgage in your ex’s name only. In the case of the man who emailed me, he should keep paying spousal support. If his ex fails to pay the mortgage, she will be the only one who suffers. He cannot do anything about the past, but in the future, refinancing in her name will protect his credit.
2. If she cannot qualify for a refinance, he should renegotiate the terms of his spousal support so that he pays the mortgage directly, sending his ex a spousal support check for the remainder.
Click here to read a longer article about divorce and credit.
Divorce can be a tough time in many ways. You’re dealing with emotional issues, separating assets, possibly separating children from one of their parents, and trying to get your respective lives back in order. The last thing you need to be worrying about is whether or not your former spouse could be ruining your credit score.
I first met Sheila when she was applying for a home loan. She had a bad credit score because the mortgage on a home she bought with her ex years earlier was dangerously close to foreclosure. “I don’t understand why this should affect my credit,” said Sheila. “I have a divorce decree and a quitclaim deed. Isn’t that enough to protect myself from the problems associated with divorce and credit scores?”
I explained to her that those documents were not, in fact, enough to protect her. The fact that she and her ex jointly applied for the mortgage loan meant that the bank still considered her just as obligated to make payments as her ex. This continues until one person refinances the loan in his or her name.
If your ex keeps the home but does not refinance it into their name alone, your credit score will be damaged if your ex becomes late on a payment. On the flip side, if you get the house and don’t refinance, your ex is still legally responsible for the payments as well. And what if they get sued? The courts could attach a lien to your ex’s properties, which could include your home!
Divorce and Credit Scores Rule #1: If you are going through a divorce, you must immediately refinance the home in the name of the spouse who retains ownership. During the transition process, protect your credit by making mortgage payments directly to the bank.
Divorce and Credit Scores Rule #2: Separate any and all jointly held accounts, as well as accounts that list you or your ex-spouse as an authorized user. This includes credit cards and auto loans.
Even in the “best” divorces, couples often have a hard time separating finances and agreeing to the terms of the divorce. Divorce often means that a couple has less access to resources. One household becomes two households, and you might end up paying 100 percent of the overhead instead of 50 percent. Finances can become tight. Even if a person has plenty of resources, the pressures of divorce, custody, courts, and moving can wreak havoc, causing a person to make late payments simply because other items on the “to do list” are taking priority.
For this reason, cancel all jointly held accounts as soon as you begin the process of divorce. You might need to close the account entirely, or you might be able to transfer the card into one spouse’s name. Regardless, decide who will carry the debt, and transfer balances accordingly.
Likewise, remove your name from any accounts on which you are listed as an authorized user. And remove your ex’s name from any of your accounts. To protect your credit score,you should also refinance cars in one spouse’s name only. If you have questions about the procedure for separating accounts, simply call your bank and explain your situation.
While divorce often causes a person to take inventory, many people forget the implications of divorce and credit. Many married couples or life partners jointly apply for credit cards, auto loans, and mortgages. Part of learning how to build credit means that you learn about how divorce can complicate your credit situation.
If you and your partner kept all credit separate during your marriage, you will not be impacted by your ex-spouse’s credit behavior at any time before, during, and after your marriage. However, if your spouse is an authorized user or joint holder of a credit card, an angry former spouse can start lots of problems with respect to divorce and credit. With joint accounts, both you and your ex-spouse are jointly responsible for debt and therefore are affected by each other’s financial decisions. For example, your ex-spouse’s late payments and collection notices show up on your credit report after the divorce if you have not split the accounts.
The best move is to cancel these cards rather than risk the negative effects of someone else’s mismanagement. Some credit card companies may require a special type of notice to cancel jointly held cards, such as a written notice. Doing this as soon as possible is in your best interest in terms of divorce and credit. After a divorce, your ex-spouse may need to charge many things to make up for reduced income. Even if your ex is not being malicious, this could harm your credit score by causing your utilization rate (the balance as a percentage of the credit card limit) on jointly held credit cards to increase.
If you and your ex-spouse own a home together, both are charged with paying off the debt unless you work out another arrangement. Aside from selling the house, your best option may be to pursue refinancing. Using a quitclaim deed, you can take your name off the title of the property, but this is not enough when it comes to divorce and credit. Your ex must also refinance, or your credit will suffer if he or she becomes delinquent on payments.
On the other side, if you retain ownership of the home and do not put the property in your name, you could be affected if your ex-spouse is sued. The house might be seized to pay off your spouse’s debts.
If you are separated, you may want to take a few steps to prepare yourself, especially if you think you are heading toward divorce. Pull your credit report and assess your financial situation, noting all existing credit accounts. Keep copies of everything in a safe place. If you have joint accounts, have a discussion with your spouse about who will assume payments for which credit accounts. If you are on peaceful terms with your spouse, have a frank discussion about divorce and credit, and how you can both protect yourselves. Consult an attorney, and create a plan to keep your payments on schedule and your credit protected.
To protect yourself from the pitfalls of divorce and credit, cancel your joint accounts, and make sure you contact all credit bureaus to ensure that your address information is updated.