2/1/2012 3:56 PM ET|
5 steps to protect credit in divorce
The breakup of a marriage can result in financial complications, but there are ways to make sure your credit doesn't suffer.
Confucius say: Beware scorned spouse with shared credit.
Maybe the Chinese thinker and philosopher didn't say those lines, but he should have. Your credit sits on dangerous ground when you and your spouse split up.
"People do unpredictable things during emotional times," says Jennifer Wallis, the vice president of Consumer Credit Counseling Service of Central Oklahoma.
One of her clients found out that her soon-to-be-ex-husband had ruined her credit while they were finalizing their divorce. Her husband had agreed to pay the Citi, Bank of America and Chase credit card accounts, but never did.
What's worse, the sabotage came when the wife needed to establish her own financial identity. Bad credit hurt her chances of getting good terms on credit cards, mortgages and auto loans, while landlords, utilities and insurance companies used it to establish security deposits and premiums. (Do you know your credit scores? Take this MSN Money quiz to get an estimate.)
"It's a bad position to be in if someone has control over your credit," Wallis says.
Here are five ways to protect your credit during a divorce:
1. Create a post-divorce budget
Don't take on more obligations than you can handle in the divorce agreement, or your credit could suffer. Remember: You're moving from a dual-income household to a single-income budget, says Ann Estes, the president of the Atlantic and Heartland regions for ClearPoint Credit Counseling Solutions.
"You need to make tough choices," she says.
Housing costs should take top consideration in your new budget. Those include the mortgage payment, along with property taxes, insurance and maintenance, or rent -- and don't forget the security deposit and renters insurance. Utilities and phone also fall under this category.
Then factor in other obligations: credit cards, auto payments, personal loans and any other insurance costs. If you find that you're close to your limit, consider what can be cut: cable, a premium cellphone plan or other luxuries.
2. Take stock of your debts and credit lines
If you've been married for a couple of decades, you've probably forgotten about all the accounts you share with your spouse, such as an unused home equity line of credit or a Sears credit card you opened seven Christmases ago.
To jog your memory, pull your credit report to see the accounts you have. Note the ones listed as individual, joint or authorized-user accounts.
An individual account in your name means you're solely responsible for the debt, unless you live in a community property state. In community property states, such as Texas and Arizona, any debts acquired during the marriage and within those states are considered jointly owned. A joint account means you and your spouse share responsibility for paying off any debt on that account. An authorized user means the account is held individually by one person who allows another to use the card without being responsible for the balance.
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Not every lender or creditor reports to the credit bureaus, so you still may miss some accounts. One spouse forgot about a line of credit she had with her dentist until her ex-husband spent $5,000 on dental work one afternoon, says Laura Creamer, a financial education specialist with CredAbility.
"He was an authorized user on that account, so she had to pay it off," Creamer says.
3. Remove each other as authorized users
Check your credit report and note every credit card that lists your spouse as an authorized user, which means your spouse is not responsible for repaying any debts incurred but is able to charge on the account. It's easy to remove an authorized user from your credit card. Simply call the credit card issuer and ask that your spouse's name be removed.
It's just as important that you get removed as an authorized user from your spouse's credit card accounts, because they can still be included on your credit report as well as factored into your credit score, says Barry Paperno, the consumer operations manager for myFICO.
However, credit-reporting bureau Experian says it includes authorized user accounts on its credit reports only if the history is positive.
You should be able to contact the credit card issuer yourself and have your name removed if your spouse refuses to do it. If the credit card issuer doesn't allow it, contact the credit-reporting bureaus and dispute the inclusion of the account on your credit report, Paperno says.
4. Untangle joint accounts if possible
The task of separating joint accounts where both spouses are responsible is more complicated.
"Many people don't understand that a divorce decree doesn't change the contract you have with your lender," says Rod Griffin, the director of public education at Experian. "The only way to remove yourself (from a joint account) is going through the lender."
Griffin recommends paying off any joint accounts and closing them before proceding with the divorce. If that's not possible, try to turn joint accounts into individual ones. For example, transfer the balance from one credit card to another that is in one spouse's name only, and close the joint account. Or try to refinance the mortgage in just one spouse's name.
If you can't split the accounts, divide the responsibilities of the joint debt. The person who lives in the house takes on the mortgage. The spouse who gets the car gets the auto loan, too. Spell out the arrangements in the divorce agreement. Include what-if scenarios to protect yourself. For instance, if your spouse is going to miss a payment on joint debt, he or she must notify you in advance, so you can make the payment and avoid denting your credit.
5. Keep tabs on joint accounts
Ask your lender to send you a copy of all joint account statements each month, even if your spouse is responsible for making payments on the account. Some may do it automatically, while others may allow access to account records online.
In addition, pull your free credit report from a different credit-reporting bureau every four months to make sure all accounts are being paid on time, says Estes. Under federal law, you're entitled to request a free credit report from each of the three major credit-reporting bureaus every 12 months, through AnnualCreditReport.com.
If your spouse isn't making the agreed-upon payments on the joint accounts, contact your divorce attorney right away. The court will likely make your spouse pay any legal fees if the creditor comes after you, along with reimbursement of any other out-of-pocket expenses, says Mark Baer, a family law attorney in California.
"It's a very risky situation," says Baer. "There's no good way around it."
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VIDEO ON MSN MONEY
As long as alimony is legal, someone will get screwed, big time. My drunk ex-wife is forcing me and my boy out of our house, because I'm ordered to pay her $1,300 a month. That's my penalty for letting her stay home for 10 years. What a dope! Marriage is for losers, guys. Until alimony is ruled unconstitutional, which it is, any one who supports their spouse is a sitting duck for disaster.
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