Some of the first questions that arise during divorce are: What happens with our debt? What happens to my credit? These are great questions and important topics that should be tackled ASAP. Getting divorced does not in and of itself affect your credit scores. However, there are a whole host of issues that can arise during or after the process which can definitely hurt your score. The good news is that much of the negative effects can be avoided if proper planning is implemented. The first step is to start by figuring out all of the debt you and your spouse hold jointly and individually.
How do you know what debt is joint and what is separate?
Well of the course the answer is: it depends. A lot of people assume that if you signed off on a loan or opened a credit card on your own without your spouse, that it is only your responsibility to pay back. Not necessarily. It actually can depend on a lot of factors such as: when you incurred it, the state you live in and its particular laws, community property state laws (if applicable), the type of debt, the court's point-of-view, and possibly how your spouse may have benefited from the debt.
For the most part, if the debt was incurred prior to marriage it is separate. Common law states will consider who incurred the debt and whether or not it was beneficial to the marriage, regardless of when it was incurred. Some states, whether they are community property or common law states, have exceptions to certain rules regarding debt repayments. This is why it is critical to really understand your state's laws and seek legal counsel if unclear.
One type of debt that is surely to come up frequently these days is student loan debt. At first glance, California (a community property state) would say that as a general rule, all assets and debts incurred during your marriage are to be split 50/50. If your student loans were taken out before getting married they would be considered separate debts. However, if you and your spouse consolidated each of your student loans after you became married, you now have created a new loan and you would both be responsible for it. Some states and/or courts may also require the spouse that didn't borrow to pay for some of the debt if they benefited from it. An example of this could be if you used some of the student loan debt for living expenses, or it helped you get a certification or degree that increased your household income.
Be sure to make a list of all of your debts which can include primarily: credit cards, auto loans, mortgages, personal loans, and student loans. From there you can determine when they were incurred and by who. At that point you will at least have a basis for planning further.
When it comes to credit reports, accounts are reported for each individual associated with that account. If you are listed as a joint owner, cosigner, or authorized user (very common), you will want to try and deal with that prior to the divorce.1 You can either pay the debts like small credit card balances (could end up being large balances if not addressed) and then close them, or you can call the lenders and see what they can do about putting an account in only one of your names. Otherwise, each of your payment behaviors will affect each others credit scores which may not be a good thing.
Taking care of joint debts before the divorce is probably your best bet; If you can remain civil during the process I think you will both have better success. One thing to keep in mind is that your divorce decree may stipulate who is responsible for paying which debts, but that does not mean that the credit reporting agencies have actually separated the accounts respectively. Therefore even though your ex-spouse may be the one who is supposed to keep paying the credit card, your credit score can be affected if they miss payments or create too large of balances going forward. Make sure you get the accounts put in your individual names if possible! Note that if you change a particular line of credit into your name alone, it is possible that a lender will want you to re-apply to make sure you can qualify on your own.
If you never established credit individually prior to or during your marriage, consider opening a card in your name to help establish credit going forward. You will also want to make sure you open your own bank account if you don't already have one in your own name. Know that you also have the opportunity to check your credit reports for free three times a year (once from each of the three major bureaus). Use them! Keep track of what is happening with your credit and check to see if the bureaus update your file after significant changes; They each update and report differently.
To request a report go here: Free Annual Credit Report
The Bottom Line
Debt is only one of the many issues you may face during the divorce process. The good news is there are many steps you can take to protect yourself, rather than having to rely on someone else. Just remember, you can and will get through it! Be honest with yourself and get help if you need it. Seek help from your advisors, tax, legal, and financial. If you and your spouse can work through the nuances together prior to separation that is always best (other than staying together). If that is not an option, consider seeking out a divorce mediator. Either of the previously mentioned methods can save you both a substantial amount of money. If there are a large amount of assets involved or other complicated issues, it behooves you to seek out your own attorney for representation.
Cameron Valadez is a CFP® Practitioner located in Riverside, CA.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
This is meant for educational purposes only. It should not be considered advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professionals regarding your personal situation prior to making any financial related decisions.