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Getting divorced can be an emotional nightmare. We know of couples that are still fighting three years after their divorces were final. It’s just never easy splitting up. Plus, the two of you may have owned a house or even a second home, have accumulated investments and created retirement funds that must be divided.
Common property versus equitable distribution
If you’ve already gone through a divorce you know whether you live in a common property or equitable distribution state. The common property states include California, Oregon, Arizona, Nevada, Texas, New Mexico, Louisiana, Wisconsin, Idaho, and Washington. These are states where any assets accumulated after the marriage are to be divided 50/50. In comparison, if you live in an equitable division state, your assets are supposed to be divided that way – equitably. As you might guess, it can be much harder to divide up assets in equitable division states. In fact, how you divide your property often ends up being decided by a judge.
The same is true of debts
In community property states, all debts that were created after the marriage are also supposed to be divided 50/50. If you live in an equitable distribution state, how your debts are handled is the same as your assets – generally through either negotiation or as mandated by a judge.
Here’s how divorce can ruin your credit
The problem is that no matter what you and your ex spouse might decide regarding your debts, your divorce decree does not supersede them. In other words, whether it’s a credit card, auto loan or home equity loan, creditors don’t recognize what the court ordered each person to pay. What happens in many instances is that the person who agreed to take care of a debt simply fails to do it. We read recently of one woman whose husband had agreed to refinance their mortgage within 90 days and get it into his name alone. However he did not do sp. When the home eventually went into foreclosure, his late payments and even the foreclosure itself were reported on the woman’s credit reports, which totally trashed her credit.
How to prevent this
If you are going through a divorce or believe you will be getting divorced in the near future there are steps you can take to protect you from having your credit ruined.
- Refinance any joint installment loans into just one person’s name. This would include home loans and car loans. This means that one of you is actually buying the asset from the other. If you can’t do this because of financial constraints, the best thing you could do is sell the asset and split the proceeds. It’s just much easier to divide cash than to divide a house or automobile.
- Close any jointly held credit cards. This is not something you would want to do unless you’re getting ready for a divorce because it will have a very negative effect on your debt-to-credit ratio and would lower your credit score. Once you close jointly held credit cards you could then have the credit card company re-issue you a new card in just your name. That way, you’ll still have the credit card if you need it and won’t be responsible for anything your ex spouse does or doesn’t do.
Understand the reality of credit card debts
The reason why it’s so important to close any jointly held credit cards is because the credit card providers are not legally obligated to recognize divorce decrees. It doesn’t matter what the two of you agreed to in your divorce settlement. If your name is on a credit card and your ex-spouse fails to make the payments that he or she had agreed to make, the credit card company will come after you.
What you can do if divorce ruins your credit
In the sad event you get stuck with a bunch of credit card debt that your ex-spouse failed to pay, there are actions you can take though none of them will be very pleasant.
- Pay off the debt. If you owe less than $5000, your best bet might be to just buckle down and pay off those credit card debts
- Get a second job. Do your owe more than $5000? Then your best choice might be to get a second job and use the money you earn to pay off those debts.
- Borrow the money. If you were able to get a debt consolidation loan, you could use the money to pay off the credit card debts. You would end up with just one monthly payment that should be dramatically less than the sum of the credit card monthly payments you’re currently stuck with.
- Take money out of a retirement fund. If you have a 401(k) or IRA that you were able to keep, you could borrow money from it and pay off those credit card debts. This can be a very good option because while you would be required to pay the money back, you would be paying it to yourself – along with the interest you would be required to pay.
- Snowball your credit card debt payments. This is where you first focus on paying off the credit card that has the highest interest rate, which then frees up money you can use to pay down the debt with the second highest interest rate and so on.
- Create a debt avalanche. This works about the same way as snowballing your debts except you begin by paying off the credit card that has the lowest balance first and then move on to the one with the second lowest balance. Many experts prefer this option, as when you see that first debt completely paid off, it can be a strong motivator to stay on your plan.
- Go to a consumer credit counseling agency. If you were to choose this option, you would get professional help in paying off your debts. You would be assigned a counselor that would review your financial situation and help you develop a debt management plan.
- Negotiate with your creditors. If you are about six months behind on those credit card payments, you might be able to negotiate very favorable settlements with your creditors like for $.50 on the dollar.
- Declare bankruptcy. While this would leave a very black mark on your credit reports it is one way to get rid of all those credit card debts and get a fresh start.