You might have heard that divorce can damage your credit. While the act a divorce may have no direct impact on your individual credit score, there are several scenarios that your credit score can be harmed during and after the divorce process. It is important for you to understand the potential issues that can arise in a divorce that could negatively affect your credit score so that you can guard against them. The Cantor Law Group can work closely with you to help you to protect your financial interests during and after your divorce.
When you get divorced, you may go from two incomes to one. While a drop in income will not directly affect your credit score, it can cause a few situations that can. Banks consider your debt-to-income ratio when they decide whether to extend credit to you. If your debt-to-income ratio is higher after your divorce because your income has dropped, this can make it harder for you to secure new credit.
Another potential problem occurs when your name still appears on a debt that your ex-spouse is responsible to pay. For example, if you had a joint credit card account that the court ordered your ex to pay in your divorce decree, your credit could be harmed if your ex-spouse makes late payments or ceases to pay it altogether. Creditors are not a party to your divorce, and they are not obligated to follow the court’s orders. This means that they can come after you for payment even if the family court judge ordered your ex to be responsible for the debt.
Having to Refinance Your Home
If you and your ex are both on the deed to your home, and you take it in your divorce, you will have to refinance the mortgage to remove your spouse’s name from it. When you apply to refinance your mortgage in your own name, the bank will look at your income and credit score to determine whether you qualify for a loan on your own. Mortgage applications also require a hard credit inquiry, which will cause a temporary drop in your credit score. Refinancing your home in your own name will also add a substantial amount of debt and affect your debt-to-income ratio.
When Not All of the Debts Were Disclosed
During a divorce, both you and your spouse are required to disclose all of your debts. If your spouse failed to disclose a debt, it can negatively affect your credit. Some divorcing spouses act in a vindictive manner and may open new credit accounts in their spouses’ names simply to try to ruin their credit. If this happens, you might not realize that damage is being done to your credit until it has already happened.
If you have joint accounts with your estranged spouse, he or she may use them to make purchases while the case is pending. This can drive up your level of debt. Unless you remove your name and close your joint accounts, you and your spouse will be responsible for additional charges that are made.
Ways to Avoid Damage to Your Credit Score During and After Your Divorce
It is possible for you to take steps to protect your credit both during and after your divorce. To protect yourself, you should do the following:
- Gather your important financial documents, including tax returns, recent bill statements, and account statements before you tell your spouse that you want a divorce;
- Talk to a financial adviser that you do not share with your spouse for realistic advice about the impact of your divorce on your finances;
- Get credit score reports from the three major credit reporting agencies to see if there are any unknown debts;
- Close your joint accounts and open new ones in your name alone;
- Place freezes on your credit cards so that no additional charges can be made during your divorce; and
- Get help from an attorney to locate all assets and debts.
If your name and your spouse’s name are both on a debt that you are unable to talk the creditor into separating, you will want to negotiate with your spouse for an agreement to pay it off in full during your divorce. It is best if you leave your marriage without sharing any debt with your spouse. Separating yourself financially from your spouse can help to avoid any issues from occurring in the future.
Gathering together all of your important financial documents before you file for divorce is also a good idea. When you ask your spouse for a divorce, it can become more difficult for you to get the copies that you need. Get copies of your income tax returns for the last three years, and copy all of the most recent bill statements from your creditors. You should also get copies of the most recent account statements for the accounts that both you and your spouse have. Look in your filing cabinet to find information from both of your retirement accounts, investment accounts, life insurance policies, and others.
You are entitled to receive a free copy of your credit score reports each year from Experian, Transunion, and Equifax. You can request your free copy at annualcreditreport.com. Your credit reports can show you if your spouse has taken out any debt in your name that you are unaware of. The credit reporting agencies also allow you to place a freeze on your credit so that new debt cannot be taken out until you lift the freeze. If you can, consider placing a freeze on your credit until your divorce is finished.
Creditors Reducing Your Credit Limits
Creditors occasionally check to see if there have been any changes in income for their customers. If a creditor sees that your income has fallen because you got divorced, it may reduce your credit limit. This can make your debt-to-income ratio higher and lead to a decline in your credit score.
One big way that people find themselves in financial trouble after a divorce is not downsizing to meet the demands of a drop in income. It is crucial for you to think about your income and expenses after your divorce. Instead of keeping the family home, you might want to consider selling it, splitting the proceeds with your ex, and both of you moving into new homes that are more affordable. You should create a realistic budget that reflects your new reality so that you do not get into financial trouble.
Get help from the Cantor Law Group
Careful planning before, during, and after your divorce can help you to avoid potential harm to your credit. It is a good idea for you to determine the likely impact that your divorce will have on your finances and then to create a plan to manage them effectively. When you work with the experienced family law attorneys at the Cantor Law Group, we will advocate on your behalf during the negotiations with your spouse in order to secure the most favorable outcomes possible. We can also help you to consider the potential tax implications of taking different asset classes in your divorce. Call us today at 602.254.8880 or fill out our online form to request a free consultation.