Managing Credit During and After Divorce

Divorce is messy. Your clients will undoubtedly be upset, stressed, and fatigued by the process. Untwining two lives isn't easy, and as with most major life changes, suddenly shifting paths often means dealing with a few miles of bumpy roads.

If your clients aren't careful to attend to their finances, they could wind up in a major credit hole with no easy way out. Good luck financing a home, car, or business investment with a tarnished credit history ' your client could face either exorbitant interest rates or a lack of willing lenders.

As a credit management adviser, I've seen too many clients destroy their credit scores by missing payments, whether out of spite, neglect, or ignorance. Advise your clients to follow these steps during and after a divorce to keep them on the path to upstanding credit.

During a Divorce

Understand the Limits of a Divorce Decree

Responsibility for shared debts is split up via a divorce decree. Perhaps your client will have to cover the car loan, while the ex has to pay the mortgage. Make sure your client understands the limitations of such an agreement: It does not change the terms of the original loan or the rights of the lender.

Any joint accounts or shared debts ' from credit cards to mortgages to auto loans ' are not automatically dissolved by a divorce. Even if the court stipulates that your client isn't responsible for the mortgage, if he or she co-signed the loan, the lender can still legally demand payments from either party. And if they fail to pay? That's a black mark on both of their credit histories.

In fact, if your clients live in a “community property” state, lenders can even come after them for debts that aren't in their name at all. In such states, debts incurred during the marriage that benefit the marital union may be fair game.

Pull a Credit Report

Once divorce proceedings have begun, advise your clients to pull their individual credit report. Federal law gives consumers the right to receive three free reports a year (one from each of the three major credit bureaus) through AnnualCreditReport.com. Distinct from the required joint financial report, a personal report provides a complete picture of your clients' obligations, helping them budget both joint and individual payments going forward.

It's imperative that your client monitor his or her credit rating throughout the divorce process ' without a starting figure, you won't be able to understand how it's being affected.

Eliminate Jointly Held Debt

A divorce does not automatically eliminate or separate shared debts. It's not difficult to imagine how jointly held accounts can cause problems: One party refuses to pay, another racks up debt out of financial distress, neither side communicates with the other. It all adds up to major credit damage.

Your client should look to close, consolidate, or refinance all joint accounts and co-signed loans as quickly as possible. As long as the accounts are open, the reporting agencies can include the ex-spouse's history when calculating your client's credit-worthiness. Once the debt is divided, move the balance into separate accounts and close the joint account.

Manage Larger Loans

In all likelihood, your client won't be able to refinance a mortgage or large loan on short notice. For debts that can't be immediately separated, the exes will have to work together amicably to avoid a credit catastrophe.

If your client is stuck in this situation, make sure he or she treads carefully. Due to “double reporting,” a late payment from either party will appear on both of their credit reports. It's nearly impossible to remove such stains from the records, and your client and his or her ex-spouse will have to wait seven to 10 years for them to disappear naturally.

Too often, divorce decrees are finalized without an in-depth forecast of the spouses' post-divorce credit profiles. Your clients may be compelled to refinance an ex-spouse out of a mortgage, only to realize that the parties can't qualify to do so after separating incomes and joint credit accounts. Have a professional verify your client's ability to refinance before agreeing upon a decree.

Preserve Credit History

If your client had little or no credit before the marriage, removing him or her from a joint account may result in the loss of vital credit history. Ensure that some of the debt is transferred into your client's name and paid down. If possible, it may be best to pay off the joint account together, and then close it.

After Divorce

Changed Last Names

Many women return to their maiden name after a divorce. If your clients wish to do so, advise them to legally change their name before applying for new accounts; this avoids confusion and clerical errors down the road. Of course, a name change does nothing to affect a client's credit rating: Credit scores are generally tied to a Social Security number and all legal names are listed on a report.

Build Credit Post-Divorce

Your client should continue to pull his or her credit reports regularly after a divorce to confirm that all joint accounts are closed. Staying on top of credit reports also prevents identity fraud and can help your client catch any forgotten obligations.

To continue to build strong credit, your client should open a personal credit card and consistently make payments on time ' this is the key to solidifying a strong standing. If recovering credit quickly is a priority, keeping balances below 10% of the credit limit will result in faster gains.

Pay Down Joint Accounts

Unfortunately, many clients may not be able to close all jointly held accounts, putting them in a precarious position. If their ex-spouses aren't making the necessary payments, your clients can preserve their credit by paying down those debts themselves ' even if the courts absolved them of any responsibility.

In some situations, it's smarter to make the payment in the first place and then seek reimbursement from the ex-spouse, rather than taking the hit of repeated missed payments on the credit report. If the ex-spouse successfully files for bankruptcy, your client may be solely on the line for any shared debt. Even if the divorce agreement held your client harmless for such debts, it's best to pay them first and seek damages later.

Protect Against Identity Theft

It's not pretty, but many spurned spouses have committed identity theft against their former partners. They are in the unique position of being equipped with their ex-spouse's Social Security number and personal information, and there's almost no limit to the damage they can inflict. In fact, a 2005 survey by the Better Business Bureau found that 50% of identity thieves were close contacts of their victims.

To guard your clients against such dangers, encourage them to sign up for a credit monitoring service to alert them of any unusual activity. While monitoring will catch fraud early on, it cannot prevent it; credit blocking actually stops fraud by putting an impenetrable hold on a client's account. The block is temporarily lifted when the client needs to access new credit. Recurring payments and credit card use are not affected.

Conclusion

Divorces are stressful, hectic, and painful. Beyond the emotional strain, the process can often prove to be a fiscal nightmare. Unfortunately, maintaining good credit through a divorce is a challenge that many recognize too late. By understanding the common pitfalls and knowing how to prevent them, you can help your clients get through a divorce without compromising their good credit.

Anthony Davenport is the president of Regal Financial, a New York City-based credit management firm. Regal Financial advises divorce attorneys and their clients on how to cultivate an ideal credit profile, build or repair credit, and protect against identity theft. Mr. Davenport can be contacted at [email protected].

Divorce is messy. Your clients will undoubtedly be upset, stressed, and fatigued by the process. Untwining two lives isn't easy, and as with most major life changes, suddenly shifting paths often means dealing with a few miles of bumpy roads.

If your clients aren't careful to attend to their finances, they could wind up in a major credit hole with no easy way out. Good luck financing a home, car, or business investment with a tarnished credit history ' your client could face either exorbitant interest rates or a lack of willing lenders.

As a credit management adviser, I've seen too many clients destroy their credit scores by missing payments, whether out of spite, neglect, or ignorance. Advise your clients to follow these steps during and after a divorce to keep them on the path to upstanding credit.

During a Divorce

Understand the Limits of a Divorce Decree

Responsibility for shared debts is split up via a divorce decree. Perhaps your client will have to cover the car loan, while the ex has to pay the mortgage. Make sure your client understands the limitations of such an agreement: It does not change the terms of the original loan or the rights of the lender.

Any joint accounts or shared debts ' from credit cards to mortgages to auto loans ' are not automatically dissolved by a divorce. Even if the court stipulates that your client isn't responsible for the mortgage, if he or she co-signed the loan, the lender can still legally demand payments from either party. And if they fail to pay? That's a black mark on both of their credit histories.

In fact, if your clients live in a “community property” state, lenders can even come after them for debts that aren't in their name at all. In such states, debts incurred during the marriage that benefit the marital union may be fair game.

Pull a Credit Report

Once divorce proceedings have begun, advise your clients to pull their individual credit report. Federal law gives consumers the right to receive three free reports a year (one from each of the three major credit bureaus) through AnnualCreditReport.com. Distinct from the required joint financial report, a personal report provides a complete picture of your clients' obligations, helping them budget both joint and individual payments going forward.

It's imperative that your client monitor his or her credit rating throughout the divorce process ' without a starting figure, you won't be able to understand how it's being affected.

Eliminate Jointly Held Debt

A divorce does not automatically eliminate or separate shared debts. It's not difficult to imagine how jointly held accounts can cause problems: One party refuses to pay, another racks up debt out of financial distress, neither side communicates with the other. It all adds up to major credit damage.

Your client should look to close, consolidate, or refinance all joint accounts and co-signed loans as quickly as possible. As long as the accounts are open, the reporting agencies can include the ex-spouse's history when calculating your client's credit-worthiness. Once the debt is divided, move the balance into separate accounts and close the joint account.

Manage Larger Loans

In all likelihood, your client won't be able to refinance a mortgage or large loan on short notice. For debts that can't be immediately separated, the exes will have to work together amicably to avoid a credit catastrophe.

If your client is stuck in this situation, make sure he or she treads carefully. Due to “double reporting,” a late payment from either party will appear on both of their credit reports. It's nearly impossible to remove such stains from the records, and your client and his or her ex-spouse will have to wait seven to 10 years for them to disappear naturally.

Too often, divorce decrees are finalized without an in-depth forecast of the spouses' post-divorce credit profiles. Your clients may be compelled to refinance an ex-spouse out of a mortgage, only to realize that the parties can't qualify to do so after separating incomes and joint credit accounts. Have a professional verify your client's ability to refinance before agreeing upon a decree.

Preserve Credit History

If your client had little or no credit before the marriage, removing him or her from a joint account may result in the loss of vital credit history. Ensure that some of the debt is transferred into your client's name and paid down. If possible, it may be best to pay off the joint account together, and then close it.

After Divorce

Changed Last Names

Many women return to their maiden name after a divorce. If your clients wish to do so, advise them to legally change their name before applying for new accounts; this avoids confusion and clerical errors down the road. Of course, a name change does nothing to affect a client's credit rating: Credit scores are generally tied to a Social Security number and all legal names are listed on a report.

Build Credit Post-Divorce

Your client should continue to pull his or her credit reports regularly after a divorce to confirm that all joint accounts are closed. Staying on top of credit reports also prevents identity fraud and can help your client catch any forgotten obligations.

To continue to build strong credit, your client should open a personal credit card and consistently make payments on time ' this is the key to solidifying a strong standing. If recovering credit quickly is a priority, keeping balances below 10% of the credit limit will result in faster gains.

Pay Down Joint Accounts

Unfortunately, many clients may not be able to close all jointly held accounts, putting them in a precarious position. If their ex-spouses aren't making the necessary payments, your clients can preserve their credit by paying down those debts themselves ' even if the courts absolved them of any responsibility.

In some situations, it's smarter to make the payment in the first place and then seek reimbursement from the ex-spouse, rather than taking the hit of repeated missed payments on the credit report. If the ex-spouse successfully files for bankruptcy, your client may be solely on the line for any shared debt. Even if the divorce agreement held your client harmless for such debts, it's best to pay them first and seek damages later.

Protect Against Identity Theft

It's not pretty, but many spurned spouses have committed identity theft against their former partners. They are in the unique position of being equipped with their ex-spouse's Social Security number and personal information, and there's almost no limit to the damage they can inflict. In fact, a 2005 survey by the Better Business Bureau found that 50% of identity thieves were close contacts of their victims.

To guard your clients against such dangers, encourage them to sign up for a credit monitoring service to alert them of any unusual activity. While monitoring will catch fraud early on, it cannot prevent it; credit blocking actually stops fraud by putting an impenetrable hold on a client's account. The block is temporarily lifted when the client needs to access new credit. Recurring payments and credit card use are not affected.

Conclusion

Divorces are stressful, hectic, and painful. Beyond the emotional strain, the process can often prove to be a fiscal nightmare. Unfortunately, maintaining good credit through a divorce is a challenge that many recognize too late. By understanding the common pitfalls and knowing how to prevent them, you can help your clients get through a divorce without compromising their good credit.

Anthony Davenport is the president of Regal Financial, a New York City-based credit management firm. Regal Financial advises divorce attorneys and their clients on how to cultivate an ideal credit profile, build or repair credit, and protect against identity theft. Mr. Davenport can be contacted at [email protected].