How many times have you been told that filing for divorce changes everything? Well, there’s one thing divorce does not change: Debts. Whether debts are categorized as separate or marital obligations, there will be bills to pay. Credit scores sometimes plunge with the upheaval associated with dissolving a marriage. This discussion offers several tips to help you maintain good credit, despite the divorce proceedings.
Understand that the act of filing for divorce has no direct impact on a person’s credit score. Generally, marital status is not a factor in formulas used by the three major credit reporting bureaus (Experian, Equifax, TransUnion) to score creditworthiness. Like ripples on a pond, it is the peripheral consequences of divorce that tend to impact credit scores.
With divorce in Arizona, community assets and debts must be divided between the spouses. (To learn more about court proceedings, read our discussion on Dividing Property in Arizona Divorce.) But unless a creditor voluntarily releases one of the spouses from a joint obligation (rare but not impossible), both parties remain legally obligated on the debt. See ARS § 25-215 regarding liability for community and separate property debts.
Consider an example: During the marriage, the spouses purchase a new car for the wife’s primary use. Both spouses are legally obligated on this community debt regardless of who actually makes the monthly payments. As part of their separation agreement, the wife is awarded her new car along and the balance owed on it. Six months after the divorce, however, she is injured in an accident and cannot work for an extended period. She is forced to resign from her job and, shortly thereafter, defaults on the car loan.
The creditor repossesses the vehicle, which was security for the debt. And initiates collection proceedings against both parties for the balance owed, plus accrued interest, expenses in repossessing and storing the vehicle, attorney fees and court costs, less the proceeds of sale. The Arizona court’s divorce decree does not modify the contract between borrower and lender – the decree binds the former spouses, not their creditors. Because the former husband signed the promissory note, he is equally liable and may be sued for breach. If the husband settles the lawsuit by paying the debt, then he may seek reimbursement from his ex-wife. In the meantime, though, both parties have sustained a negative strike on their credit reports along with a corresponding reduction in credit scores.
Similar scenarios play out all too frequently, sometimes years after the divorce. In a nutshell, one former spouse’s non-payment on what was a community debt (allocated to that party in the divorce) may end with default and both parties’ credit scores damaged.
There are many things you can do to maintain your healthy credit score through the divorce and thereafter. Good credit is essential for borrowing, whether the plan is to remodel the house, buy a vehicle, or start a small business. Do your very best to manage money prudently and take extra precautions to protect your credit score.
With divorce, community debts are divided, separate debts are allocated, and legal expenses are incurred. There are moving costs and expenses associated with renting an apartment or buying a new home. There are car payments, utility bills, insurance premiums, food and personal expenses, healthcare and medical costs, and repair bills. Divorce may leave the former spouse without an adequate financial cushion should there be a big repair bill, accident, or illness. With a temporary job loss, an emergency fund is necessary to help ride-it-out. The consequences of divorce almost always have a negative impact on cash flow, at least for a while. For this reason, the aftermath of divorce can cause credit scores to nose dive.
Being prepared can reduce financial vulnerabilities. There are many tactics you can employ to prevent divorce from ruining your credit score.
We are talking about ways to mitigate the financial consequences of divorce where your credit score is concerned. Maintaining good credit is necessary for a comfortable lifestyle and for financial independence after the marriage is dissolved.
A good credit score is essential for borrowing from the bank on reasonable loan terms. Credit scores influence insurance rates and employment opportunities. Employers often pull credit reports on job applicants, gauging level of honestly and dependability by how an applicant handles personal resources. Good credit is all about exercising ordinary prudence over various financial matters.
Calculating income, controlling expenses, building an emergency fund, and staying within the monthly budget is the path to sustained creditworthiness. Use the following tips to keep and elevate your good credit score and improve your financial power before, during, and after divorce.
Whether the pattern is to purchase many small things or a one-off splurge on a big thing, such as a sports car, do not surrender to the instant gratification of a shopping spree. For some, compulsive buying can be addictive behavior. In all cases, the piper must eventually be paid.
A shopping spree is not a “feel good” solution for relieving stress in divorce. The temporal pleasure is far outweighed by the anxiety of receiving a statement that exceeds one’s checking account balance. Furthermore, a shopping spree could appear to the court and opposing counsel to be an attempt to sabotage the other party’s good credit. Charging excessively to your separate account will sabotage your own credit score.
If you have difficulty paying the bill or risk running out of cash before the end of the month, then look very critically at your spending habits. Take steps to curtail, perhaps eliminate, all non-essential purchases – small and large.
Do keep close tabs on what your spouse does with community funds. Until the divorce is final, your spouse will have access to any joint credit cards or charge cards that are still open. (With the former, the balance is carried forward to the next billing cycle. With the latter, the balance must be paid in full with each statement).
If the other spouse promises to pay the credit card bills, then follow up by making sure that he or she actually does so. Don’t merely ask, “Did you pay the VISA statement? Verify that payment was made and has cleared the bank. Your good credit is on the line. Also keep close track of all accounts that your spouse has access to. No one likes being hit with past due charges, increased interest rates, and over-limit penalties on shared accounts!
The best scenario is to agree to pay your share of the marital debts, but not to pay your spouse’s share. As discussed above, division of debts (property) is part of every divorce in Arizona. Quell the desire to show you are the more magnanimous or the more fiscally responsible party by taking on the lion’s share of marital debt. Do not take on more of the marital debt than you can realistically afford to pay. Part of letting go is allowing the other person to be independent and responsible. Altruism aside, when there is a choice, avoid accepting additional obligations that could jeopardize or potentially cripple your financial situation moving forward.
Make sure you know precisely ”who owes what” on every debt, every credit card, charge card, line of credit, or loan agreement. In Arizona community property law, if a debt was incurred during the marriage, then it is presumed to be a marital debt and liability for its satisfaction is shared equally by the spouses.
If you have a separate credit card account and your spouse is an authorized user on that account, then consider removing your spouse at the earliest opportunity. An authorized user on a credit card can make charges, but is not legally obligated to pay the account. This could be disastrous in a divorce. Are you an authorized user on your spouse’s separate credit card? Consider removing your name from that account, too. Avoid any possibility the other party’s default on that account sometime down the road could cast a shadow over your creditworthiness.
Carefully, diligently monitor all joint accounts along with your own separate accounts during and after the divorce. Track all spending to ensure early detection of any problems, including imprudent spending (shopping sprees, as discussed above), wasteful spending on a paramour, unauthorized use, or other acts that are a detriment to the marriage.
Whenever possible, immediately close joint accounts. Until they are closed, protect your interests. Ensure you receive regular monthly statements from the lender, bank, or credit card company so you have notice if there is a late or inadequate payment problem long before any default occurs.
For example, one spouse stays in the marital home which is where the children will continue to reside. If there is a home mortgage, then in most instances both spouses are obligated to make the payments. Until the spouse awarded the marital home refinances in his or her name only, the other spouse remains a borrower on the original promissory note and remains liable on the whole debt. Failure to pay the mortgage could result in default and, if not cured, foreclosure proceedings or trustee sale.
Lots of people have an aversion to recordkeeping, but this is a necessary life skill. In divorce, poor recordkeeping habits can create a paperwork nightmare for the entire legal team and could impact the outcome of the case.
What follows are some recordkeeping tips to help you stay on top of financial matters and divorce proceedings. Being steadfast in your efforts to protect your credit score and being a good client who takes the divorce proceedings seriously should make recordkeeping more palatable. Know organization and staying abreast of these matters at all times is necessary for the best possible outcome in the case.
Start by ordering your credit report, which will also provide a credit score. You can obtain a free credit report every 12 months from each of the three nationwide credit reporting companies. For details, visit the Federal Trade Commission website here.
Our experience has been that simply falling behind on recordkeeping is a big problem for our clients. Not because they do not take the legal aspects of their divorce seriously, but because the weeks fly by so swiftly. The problem is essentially one of time management. Set aside enough time each week to organize divorce records, update lists and calendars, file away copies of court documents, and prepare questions for the divorce attorney. Make sure to set aside at least one hour, preferably two, each week for divorce recordkeeping and bookkeeping.
Divorce is challenging on many levels. Try not to let frustration with your spouse get the best of you. Tossing your attorney’s correspondence and copies of the pleadings into a box and putting a lid on it is not productive and will not advance your case. Anger at a surprising credit card charge believed to be your spouse’s gift to his or her paramour is not something to leave unaddressed. If a document or statement evokes emotions that are still too raw, then pause and put it aside for the moment to work on later. But not much later. Get it done.
Good recordkeeping, along with handling and reviewing documents and files once a week refreshes memory, helps track and find credit problems, and will help you stay in top form on the issues raised in the divorce. When will the child custody evaluator interview you and the other parent? Will temporary orders be issued at the upcoming Resolution Management Conference? Has the other party agreed to mediate property division? At any given time, you should know the current status of your case and where things are heading procedurally. Knowing where the case is headed is also a predictor of the legal expenses that may be necessary.
During divorce, there will be times when everything in your case seems to happen simultaneously – a blur of activity, hearings, and paper-pushing. There will be other times, the divorce doldrums, when there seems to be no progress in the case at all. Divorce doldrums can drive a person to distraction. When there is little you can do but wait for a call from your attorney, don’t sit around anxiously. Be productive in helping advance your case.
Divorce is a complex, difficult matter that changes anyone’s lives. During such emotional times, it is important to think logically and clearly for the best outcome. Don’t go through these stressful times alone. Contact our Arizona divorce lawyers today for expert legal assistance. You can contact us at (602) 548-3400 to set up an appointment.