One of the nastiest shocks faced by many divorced people is how quickly an ex-spouse can ruin their credit. Here’s how to protect yourself and handle loans and shared assets.
By Liz Pulliam Weston
When Joan divorced several years ago, her ex agreed to pay off the couple’s $20,000 in credit-card debt. They made the agreement part of their official divorce decree.
That, Joan thought, was that. Except every couple of months since then, creditors have called her because her ex has missed a payment. Despite the divorce agreement, she’s still on the hook, and all the late payments have trashed her credit.
“I just assumed my responsibility ended” once the divorce was final, said Joan, a Los Angeles homemaker who asked that her last name not be used. “But it turns out that’s not true.”
Many divorced people learn the hard way that creditors don’t care how property and bills are divided in a divorce. If a debt was incurred in a joint account, both spouses are responsible for paying it back.
Don’t expect a phone call
Your agreement with your creditors predates your split, explains divorce attorney and financial planner Amy Boohaker of Sarasota, Fla. You can’t force a creditor to abide by an agreement you make later with your spouse.
And not every divorced person gets a phone call to notify them that their ex is in arrears. It was only after Atlanta resident Tony Martin pulled his credit report, for example, that he learned his ex-wife had failed to pay the mortgage on the family home she received in their property settlement. Since his name was still on the loan, the foreclosure will remain a major blot on both of their credit reports for seven years.
In an ideal world, divorce attorneys would alert the clients to these dangers and help them protect themselves. In reality, the discussion may never happen. A couple may not use an attorney, or the lawyer may not be fully aware of the credit problems an irresponsible or vengeful ex can cause.
You need an action plan
“How many divorce attorneys sit down with their clients and talk about how they’re going to handle joint debts?” Boohaker asked. “They let (the clients) go off and solve that on their own.”
Martin’s experience prompted him to help start a business to help people protect their credit in a divorce. The business, DC Processors of Southlake, Texas, contacts creditors and arranges for accounts to be closed or frozen.
You have three choices with secured loans:
- Sell the asset. This is the cleanest choice, since you can pay off the loan and divide any proceeds from the sale.
- Refinance the loan. This is the second-best choice if your ex has enough income and good credit to qualify for a loan in her own name — or can convince a relative to co-sign the loan. Ideally, you would hold off making your divorce final until the refinancing was completed.
- Remain on the loan — with conditions. Sometimes it’s not possible to sell or refinance before divorce proceedings are finished. Perhaps your ex will continue to live in the family home with the kids, but can’t qualify for a refinance on his own.
In this case, attorneys say, it’s usually best to set some kind of time limit so that you’re not on the hook forever. You might agree, for example, that when the kids are 18 the home will be sold if your ex still isn’t able to refinance.
To further protect your credit, consider having the lender send the loan statements and payment coupons to you at your new address, or get Internet access to the account. That way you’ll be able to see if your ex is falling behind and perhaps step in before both your credit ratings suffer.
The loan and the title
You also can encourage your ex to put the payments on automatic by having the lender deduct the monthly bill directly from his checking account. That will ensure the bill is paid on time each and every month.
But here’s an important tip for secured loans: Don’t allow your name to be taken off the title if your name is still on the loan. You don’t want to be responsible for the debt if you no longer own the asset.
All this is stuff Joan wishes she had known before her divorce was final. Her ex’s credit is too bad for him to get credit cards in his own name, so the debt can’t be transferred off their joint cards. If she decides to pay the bill herself, she has little recourse against him, since he has no property for her to put a lien against. She would have been better off taking on the debts herself, she realizes now, and getting a bigger property settlement to offset the liability.
“You’re always relying on his good behavior,” Joan said. “If he’s not responsible, you’re in a no-win situation.”
Liz Pulliam Weston’s new book, “Easy Money: How to Simplify Your Finances and Get What You Want Out of Life,” is now available. Columns by Weston, the Web’s most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.