When Divorce and Credit Collide

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I received the following email from a Minter regarding how he should handle an upcoming divorce.

“John – I’m about to finalize my divorce and I need to weigh out all my options with the debt vs. assets.

Bankruptcy is on the table, as is liquidating everything and paying off debt, and a variety of other options. Do you have any advice?”

Divorce is never an enjoyable or smooth transaction and the last thing you need to worry about is dealing with your debt while you’re trying to figure out things like housing, work, and childcare.

But, dealing with your credit and debt is unfortunately a necessary evil and is one that is often overlooked.

There are a few rules to keep in mind if you are going through or ever go through a divorce.  They are:

Your Creditors Will Not Honor Divorce Decrees

You will eventually come to an agreement with your ex-spouse that assigns responsibility for paying pre-marital debts.

But, despite that fact that the court has approved a settlement agreement or even ordered one party to make payments on joint debt, do not expect your creditors to honor or even recognize those arrangements.

Your creditors are not a party to your divorce proceedings.

If you are ordered to pay the joint mortgage (or any joint account) and you start missing payments then those late payments will show up on your credit reports and your ex-spouse’s credit reports.

There will likely be credit damages including lower credit scores and the resultant credit limit reductions or suspensions. Your ex-spouse can sue you for credit damages.

Bankruptcy Will Only Protect One of You

If you go through a bad divorce and your debt has piled up to the point where payments are impossible then you have to consider protecting yourself from your creditors.

That’s what bankruptcy does…it provides legal protection from your creditors. Bankruptcy is never an easy choice but it’s often not the worst option.

If you or your ex-spouse file for Chapter 7 bankruptcy then creditors are no longer allowed to attempt to collect a debt. But, the protection only applies to the individual that filed for bankruptcy.

If you are jointly liable for a loan and your ex files for bankruptcy then the creditors will come after you, and only you. You’d have to file for bankruptcy as well in order to protect yourself.

Bankruptcies remain on credit reports for up to 10 years.

The Solutions Stink

If your ex-spouse isn’t making payments and the late payments are starting to pile up on your credit reports then you have some decisions to make– and none of them are any good.

You can certainly protect yourself with the bankruptcy option. You could also make the payments to your creditors that are supposed to be made by your ex-spouse.

Creditors don’t care where payments come from, as long as they’re coming from someone.

If you share a credit card with your ex you could pay it in full and close the account. That will protect you from any future charges and any future missed payments.

If you share a mortgage or an auto loan then you can buy the car or the home and refinance it in your name alone, assuming you can qualify for a loan.

Another solution in the case of a joint mortgage or an auto loan would be to sell the house or the car to a 3rd party.

If you’re lucky you could sell it and use the proceeds to fully pay off the loan, thus getting both you and your ex off the hook for any deficiency balance.

This is uncommon for auto loans as you are normally upside-down until the loan is close to being paid off.

And, of course, if both of you are on the loan then both of you are going to have to work together to sell the item.

You both have to agree to sign all of the requisite paperwork, which means cooperation between two parties that probably aren’t terribly fond of each other at the time.

You may have noticed that none of the above scenarios are very good. This is the problem with joint debt. It’s never easy to divorce.

This is why I always suggest that you maintain credit independence even after you’re married.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.