Ask John:
Credit and Divorce

AskJohn@credit.com has been around for three months now. As promised, I’ve read and responded to thousands of your emails. I am very pleased and flattered that you have taken the time to send me emails asking me very personal questions and trusting that I’m giving you solid credit advice and direction. I hope my words are encouraging and helpful.

I’m sorry to report that I’ve gotten an incredible amount of email from women who have gone through a divorce. Their story is almost always very similar. They’ve all had their credit destroyed because of their divorce and they didn’t see it coming. Here is an example of one of the divorce-related emails:

Subject Line: Credit Disaster

John,

I was divorced in March of 2005. I was raising our children, so I wasn’t working outside of the home full time. As part of the divorce settlement, my ex-husband has the home and was supposed to have refinanced it within 90 days of the divorce. He was supposed to refinance it into his name so that it would get my name off of the mortgage loan.

He did not do what he was asked to do and the home went into foreclosure a few months later. I didn’t realize it at the time, but the late payments and eventually the foreclosure were being reported on my credit reports, all three of them. Up until then, I had great credit and great credit scores. Now I have horrible credit and horrible credit scores.

My credit is ruined. When I called the mortgage company and explained that the court ordered that he pay the mortgage and refinance it, they told me that they don’t recognize the court’s order. How can that be true?  I thought the court was the boss.

I finally found a job earlier this year but my bad credit almost prevented me from getting it. I guess my employer can also look at my credit reports? 

How could I have prevented this from happening?

I’ve gotten emails from women who have had the same story with credit cards, auto loans, and home equity accounts. They all assumed that because the court ordered their ex-husbands to pay the accounts that they were in the clear. Unfortunately, they all found out the hard way that what the courts say doesn’t really count for much.

Here’s the deal: the divorce decrees do not supersede the original contracts with your lenders. That means that just because the court orders one of you to pay a loan obligation, it doesn’t release the other spouse from liability on the account if it was originally opened as a joint or co-signed account. The lender doesn’t recognize that order as an amendment to the contract that both spouses signed. Both parties are still as equally liable as when the account was opened.

Since both parties are liable, it’s likely that the account is being reported on both individual’s credit reports. And, if the account goes delinquent, regardless of the reason,  the delinquencies will be reported on both spouse’s credit reports. This will severely damage the credit reports and credit scores for up to 7 years.

The biggest travesty in all of this is that it didn’t need to happen. And, it wasn’t expected. So much time and money is spent preparing for and carrying out the divorce and so little attention is paid to the most lingering effects of a divorce: the damage to credit reports.

Not that it’s much help to the nice people who have sent me emails, but here’s how they could have prevented this from happening, or at least reduced the damage.

1. Refinance any joint installment loans into one person’s name. That means car loans and home loans. Essentially one person will be buying the asset from the other. If your finances don’t qualify you to do this then you’ll want to sell the asset and split the proceeds. It’s easier to divide cash than it is to divide a house.
2. Close any credit cards that are jointly held. This isn’t a strategy that you’ll want to employ for any other reason other than preparing for a divorce since it could lower your credit scores. Have the credit card issuer re-issue you a card in just your name. That way you’ll have the account should you need it and it will only be in your name.

Do all these things as well in advance as you possibly can since the divorce may get ugly at some point. If and when that happens, you can pretty much assume that you’re not going to get any help from your adversarial soon-to-be-ex-spouse. Get these things done before things deteriorate.

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