Money always looms large in divorce. Finances will be tight and your standard of living will likely take a hit, at least in the short term.
While you may be worried about income and living expenses, do not overlook credit issues. Long after divorce, joint debts can be a financial burden or hamper your credit rating and ability to borrow. Read more about untying the knots of your intertwined credit.
Toward credit independence
You won’t be truly financially independent as long as you are still connected to your ex-spouse by outstanding debts (or defaults). There are steps you should take before and during the divorce process to untie the legal and financial knots to establish your separate credit rating.
- Take stock of your debts – You need to get a handle on all shared debts and liabilities. This includes the mortgage, remaining car payments and other collateralized loans, as well as unsecured debt such as credit card balances, personal loans or a line of equity. Whose name is on the debts? Are there co-signers? Are there outstanding liens?
- Separate your accounts – Open a bank account in your own name and then close joint accounts as soon as feasible. This is an important step to separating your finances (and protecting yourself). Credit cards are especially dangerous if you both have a card but the bill is in your name. A spiteful spouse may drain the joint checking account or run up the credit card balance.
- Pay down debts before divorce – If the two of you have the wherewithal, paying off lesser loans and credit cards now means fewer debt demons that can come back to haunt you later. One caveat; don’t use your money to spend down debts that the other party will be responsible for in the divorce decree.
- Protect your credit rating – A good credit score is a tangible asset – your ability to borrow, and at the most favorable terms. A spouse who is delinquent or defaulted on debts can bring your credit rating down if your name is attached to the debt. Contrary to the previous paragraph, it could be worthwhile to help your estranged or ex-spouse pay off or refinance their debts. Ideally, you can negotiate something in exchange, such as another marital asset or higher/lower support payments.
- Protect your assets – Your personal wealth is risk at f creditors come after you for your spouse’s debts. Assets that you will possess, such as your car or the house, need to be retitled and/or refinanced in your name. Likewise, you want your name taken off of loans and assets that belong to your spouse.
- Be cautious in acquiring new debt – You need to spend and borrow to establish and maintain a good credit rating. The key is to live within your means, which is more difficult after divorce. Be choosy about acquiring new credit cards – interest rates, rewards, credit limits – and pay off the balance each month.
Joint debts may have legal, financial and tax implications. It is important to consult a divorce attorney who has experience with complex marital assets and creative solutions for marital debt in the bigger picture of divorce, property division and post-decree support.