The analogy “You Can’t Un-ring a Bell” holds true in most every case. Unfortunately a large number of Americans do just that when they call it quits with their spouse. Some end amicably and some, well let’s just say they end.
No matter the situation, there are a lot of variables that are affected when two individuals decide to go separate ways. For sake of this article and your time I will not list them because I’m not a marriage counselor!
What I will offer my two cents on is the impact a divorce can have on our credit reports, and financial independence. Often, clients apply for our services after their divorce has been finalized and find that their credit separation has not!
Part of every divorce decree is a list of financial obligations as well details of who is going to maintain responsibility for those debts. So it may say Sally gets the house and must refinance the property to remove John from the mortgage and title within 2 years. It may also say that John gets the car and must assume liability for all credit cards and student loans.
So in a perfect world, Sally would refinance and John would pay all the bills he agreed to. Well we know that the world is not perfect and life challenges us all.
Sally often finds that even with alimony, maintaining a mortgage payment is hard and the lender may not choose to refinance the property with just her income. John may have a challenge meeting his obligations letting the credit cards and loan payments go so he can make ends meet. So where does that leave us.
If Sally and John still have both of their names on their accounts, they are mutually ruining each others credit. Not only can this cause a rift in an already defunct relationship, it can severely impact their ability to borrow.
In regards to divorce and credit, this is the single biggest misconception I have heard over the years. “My divorce decree says that the obligation is theirs. Can’t I just show that to the lender or the credit bureaus?” The short answer is… no.
Here is the reality. In a court of law your divorce decree is valid and legal. To the credit reporting agencies and lenders, your name is still on the debt and you are still liable. Your divorce decree does not override your agreement you entered with them.
So what to do? I suggest doing everything you can to separate your credit while you are separating your lives. It is much easier near and long term to work together so that each of you can move forward in your new lives with a healthy profile.
If the mortgage is being assumed by one of you, make sure that person can credit qualify for the new loan. If that is not possible then you will know ahead of time to sell the house and split the funds.
If you have joint credit cards, remove whoever is not taking financial responsibility. This way if late payments are made, they won’t impact the others credit report.
Installment loans may be tricky. If you are both signers on the loans contact the lender to discuss your options. Often a car loans can be refinanced similarly to a mortgage and the payment may actually be lowered!
By taking action proactively instead of being reactive, you can thwart a lot of potential challenges. Who knows, maybe being proactive together with your credit can help you be proactive with your relationship and change your mind. But like I said, I am no counselor.