Divorce is no walk in the park. Emotionally, physically and mentally - going through a divorce can be exhausting. While the process can take a lot of energy, it's important not to lose sight of the financial matters that you do have control over. You can prepare for the possible effects of divorce on your credit and finances by keeping the following things in mind.
Know the Law
The process of separating your financial assets is complicated. Before you make any moves, it's best to read the applicable laws and get advice from a qualified professional. For example, two key issues to be aware of are the implications of shared accounts and, if applicable, community property.
When you open a credit card or take out a loan, you enter into an agreement with a creditor. Final divorce papers that allocate ownership and responsibility for certain accounts doesn't nullify or change that agreement. Whether or not your former spouse takes over an account in the decree, if you cosigned on a loan or you're listed on a joint account, creditors may still hold you responsible for paying back any debt if your ex doesn't pay.
There can be more issues to contend with if you live in a community property state. Laws vary amongst community property states so you should consult a qualified professional to determine how your particular debts or accounts will be treated. For a list of community property states and more information, you can visit this IRS resource.
Diligently Manage Shared Accounts
You most likely share several credit accounts with your partner. Even after a divorce, shared accounts and cosigned loans will very likely appear on both of your credit reports, and if your former spouse misses a payment or overspends, that activity could hit your credit score. Creditors may pursue you for payment, and if the situation worsens, collections agencies could come calling.
You can start the process of separating accounts by reviewing your credit information and searching for any shared accounts. Keep in mind that not all creditors report activity to the credit bureaus, so your credit report won't be a fail-safe solution. You may also want to reference old account documentation to try to hunt down other accounts you may have missed.
Once you've identified the relevant accounts in question, you can call your credit card issuers and see what options you might have to remove any authorized user relationships. Shared accounts (like those for credit cards, banking and retirement) are a little more complicated. Each situation varies and your contractual or other legal obligations may limit the extent to which you can separate any accounts, so you should consult your lawyers and lenders about your available options.
Monitor Your Credit
Keep an eye on your credit report throughout the divorce process to make sure everything is reported as it should be. Creditors typically report activity on a monthly basis, so it might take some time for any changes regarding shared accounts to reflect on your report. Regular monitoring will tell you if you need to follow up with any creditors after it's been a while. Enrolling in free credit monitoring services will also alert you to changes on your credit report to help you spot any possibly incorrect information on your report. You may want to watch out for accounts you never opened and hard inquiries placed by creditors you never applied for credit with. Performing general upkeep will help you keep everything in order as you rebuild and find your footing again.
While your marital status isn't included on your credit report and filing for divorce won't directly hit your credit score, the resulting credit activity could still impact your credit health significantly. Consider taking the three suggestions above to set yourself up for a better outcome regarding your credit and divorce. It might take time to sort everything out, but covering your bases is worth it.
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