Protecting Your Credit After Divorce
Many people overlook the importance of credit after divorce. From start to finish divorce can feel more like a whirlwind than an orchestrated and well-planned process. Most couples will only realize the importance of protecting their credit after divorce. The best approach to protecting your credit is to be proactive. I've outlined the basics of understanding your credit and steps you can immediately take to protect it.
3 Steps to Protect Your Credit Before, During, & After Divorce
What is Credit?
Credit refers to your ability to borrow. Your credit is a reflection of your reputation as a borrower. When you try to obtain loans or a line of credit your “credit” gives the lender information that tells them how likely you are to repay the loan or line of credit.
Understanding the Impact of Low or No Credit After Divorce
Your credit determines your ability to buy something without requiring an all-cash payment or a cosigner. So, if you have a low credit score or you have no credit history of your own, then it will be difficult to qualify for loans independent from someone else. Little or no credit can make it difficult to obtain a loan for buying a house, renting an apartment or buying a car. The inability to obtain these items independently can make it hard for people to begin a financially independent single life post-divorce.
How Do Lenders Acquire Credit Information?
Lenders, credit card companies, insurance companies, landlords, and even some employers will pull your credit report. Your credit report is a collection of information that tells them things like:
- Loans you’ve had in the past, how much you’ve borrowed on each loan, and your payment history on those loans. Whoever has pulled your credit is wanting to know how many times you were late in making payments. This information is used to tell the potential lender or landlord about your historical behavior in paying your debts. They will use this in determining how likely you are to pay on debts in the future.
- Loans you currently have and the minimum monthly payment of each loan. They also see things like the funds you could borrow if you wanted to – such as credit card limits on open credit cards. What they want to know is how much you have in minimum payments each month. Compare that total to your available income and then see how much you have left over to afford the new payment.
- Bankruptcy, foreclosure, account write-offs (such as an overdrawn bank account, unpaid medical bills, unpaid utility bills, etc). If you see an error on your credit report, then you can dispute it. The credit bureau will ask for certain information to show that you paid the debt in full and on-time.
Your credit report is the master document behind your credit score. It serves as your reputation for paying your debts and bills.
3 Steps to Protect Your Credit Before, During and After Divorce
- First step to protecting your credit after divorce: pull your credit report. You are allowed to pull 1 free credit report each year. For my clients, I make this part of the necessary documents in the divorce process. If someone is contemplating divorce, then I always recommend they pull their credit report sooner rather than later. And when I’m working with both spouses I have each person pull their credit report. The information from the credit reports allows us to see which accounts are open, even if they are not being used, and if they are individual accounts or joint accounts. Being informed is the first step in protecting your credit after divorce.
- Second step to protecting your credit after divorce: keep your address up-to-date. If you receive statements in the mail and you and your spouse decide to live separately during the divorce, then you will want those statements to come to your new residence. If you have joint credit cards or joint loans you will want to be able to access those statements electronically. Most lenders now have electronic statements available. Customers can login to their account and view them. Whenever possible, you should share this information with each other so you can each go in and look at the statement monthly.
- Third step to protecting your credit after divorce: for each loan you have – either jointly or individually – set up an automatic payment for the minimum payment. There’s a great deal to think about and take care of in the divorce process. Bills can escape immediate attention and get lost in the shuffle. Automatically making the minimum payment will save your credit score by avoiding late payment notifications. You will also benefit by avoiding those annoying late fees.
Critical Fact to Understand About Your Credit After Divorce
It’s important to remember that divorce won’t affect your credit directly, but for the reasons mentioned above, divorce can affect your credit indirectly. The best action you can take is to be proactive, be informed, and make sure you know the loans and accounts you are responsible for.
Be mindful that when your name is tied to a debt you are responsible for the payment - even when the divorce decree states your former spouse is responsible for it. So, if your former spouse fails to make a timely payment, or fails to make any payments after the divorce, then your credit can be impacted by their non-payment.
In most situations, the financial institution only cares about the name(s) associated with the debt. Unless your name is removed from joint debts in the divorce process, the financial institution will come to you for payment when your former spouse fails to pay.
Transitioning to the divorce process while planning for your financial future is multifaceted and requires a multipronged approach. Certain divorce processes support a better-planned transition than others. To learn about your Missouri divorce process options contact one of our experienced St. Louis Collaborative Law professionals today.
Nicole Davis is a certified divorce financial analyst, trained mediator and collaborative law professional. She is experienced with helping couples achieve a good financial settlement. To learn more about divorce finances give her a call or visit her website.
Money has emotion attached to it. Money represents security and safety. Lack of money means insecurity and fear. Divorce means money will be split up. Splitting one pot of money into two pots of money creates emotion, and rarely are these emotions positive.
For many in divorce, it’s a surprise that their 401k is a marital asset. This happened to me. I had worked hard to save the money in my work retirement plan and I was proud of what I had managed to put aside. With an ex who was a small business owner, that retirement nest-egg was critical. When it came time to split up, however, I wanted to hold on to what I felt was my retirement. In my mind, it was mine! In reality, it was not mine, it was a marital asset and subject to being split in the divorce. This misunderstanding on my part caused me to have angst and to feel anger, which complicated the negotiations and created more acrimony.
This is, sadly, an unfortunate and common scenario. For many, the money they have saved in their work retirement account is the bedrock of their retirement plan. Losing any of it causes insecurity and fear, which in turn causes anger, resentment and the possibility of a protracted fight in divorce court, aggravating the process and costing even more money with professionals.
The bottom line is this: be aware that any savings accumulated in the course of a marriage is a marital asset and subject to be split in divorce.
Work to put your emotions aside as you make decisions that will impact your future, your soon-to-be-exes future and possibly your children’s futures.
Money represents security. In the process of divorce, look for the ways to create and rebuild two new foundations for security where there once was just one. Remember, your family is still a family, even when there are two houses.
To learn more about your divorce process options reach out to one of our experienced St. Louis Collaborative Law Association professionals today.
About the Author : Laura Boedges
Laura is a financial professional and former member of CFLA.
Buying a House After Divorce
If not already, then at some point in the future you and your spouse will live separately. Like many people, you may think about buying a house after divorce. If this is your goal, then there are several things you will need to consider. Protecting your finances will need to be a top priority. The sooner you start planning the more prepared you will be to accomplish your goal.
Here are 4 Financial Tips to Buying a House After Divorce
Establish Your Income
It will be important to establish your own income. For you, this may be easy or challenging. Perhaps you're established in your career and currently earn income. Or, perhaps you are receiving income from a pension, social security, dividends or interest. Regardless of your situation, it will be important for you to establish your income because lenders consider income as part of your ability to repay a mortgage. Sporadic income will reflect negatively on your ability to repay a mortgage.
Establish Your Cash Flow
The amount and frequency of your income will impact how much house you can afford. It will also determine the funds available to pay your monthly expenses. You will need to do an evaluation of the money available for housing expenses. This is calculated as:
Income - Basic Expenses (before housing) = Money Available for Housing Expneses
You will then need to calculate the expenses associated with buying a house after divorce. It might help to think of your expenses and how they fall into these categories:
- One-time Expenses
- Ongoing Monthly Housing Expenses
Once you know your ongoing monthly housing expenses you will calculate how much money you have left after basic needs and housing expenses - this is called discretionary income:
Money Available for Housing - Ongoing Monthy Housing Expenses = Discretionary Income
Helpful Tip: It can be challenging to think of all the potential expenses related to buying and owning a home. Here are some things to keep in mind about one-time purchase expenses and ongoing monthly expenses:
One-time Expenses of Buying a House After Divorce:
- Down Payment
- Closing costs
- Funding the escrow (prorated current year real estate taxes)
- First year of insurance premiums
- Appraisal fees
- Inspection fees
- Required repairs
- Title insurance
- Loan processing fees
Ongoing Expenses of Buying a House After Divorce
- Mortgage payment (principal, interest, taxes and insurance)
- Pest control
- Utilities: electric, gas, water, sewer, trash, cable, phone, internet
- Security system
Establish Your Credit
You will want to establish your own credit as soon as possible. This could take some time if you have little credit history or when your credit has been established jointly with your spouse. While married, you may not have opened loans or charge cards in your name individually. Most joint loans and credit cards are closed during the divorce process. The closing of those accounts can negatively impact your credit.
If this happens, then it can be difficult for you to qualify for loans and charge cards in your name solely. There are steps you can take to establish credit before, during and after divorce.
Protecting Your Credit
Unless you are paying cash, your credit will be the most important factor in your ability to buy a house. Therefore, it is very important to protect your credit before, during and after divorce. The best approach is to be proactive.
Here are some steps you can take today to protect your credit:
- Pay individual and joint bills on time, every time. This is true before, during and after divorce. The best way to do this is to set bills up on auto pay or request that your spouse do so. This will help you avoid unnecessary late fees, as well as unnecessary reporting to the credit bureaus. Life is busy and it’s easy to forget about certain bills. So, make your life easier by setting up automatic payments for everything that you can. Also, you may not know this, but creditors generally care about the name(s) of the individual(s) on the loan or account. They don’t generally care about the agreement outlined in the divorce paperwork. Therefore, they will try to collect payment from the people on the account. This may be different than than the agreement made in your divorce settlement.
- Pull your credit report. The best protection is prevention. Be informed and pull your credit report. You can pull your annual credit report for free. Review your report and make sure you know what accounts are open in your name – individually and jointly. If you and your spouse agree that one person will be responsible for a joint debt after divorce, then make sure the debt is either:
- Refinanced into the responsible person’s name
- There is some agreement to automatically make the payment and there is regular reporting of the payments made
- The joint debt is paid in full during the divorce process or as part of the divorce settlement
Transitioning the divorce process while planning for your future is multifaceted and requires a multipronged approach. Certain divorce processes support a calmer, better planned transition than others. To learn about your Missouri divorce process options contact one of our experienced St. Louis Collaborative Law professionals today.
Nicole Davis is a trained collaborative law professional. She is experienced with helping couples achieve a good financial settlement. To learn more about divorce finances give her a call or visit her website.
The Neutral Financial Professional in Divorce
A neutral financial professional helps clients identify financial goals and priorities, understand short and long-term implications of dividing marital property, and tax implications. This article briefly touches on the 3 most common finance professionals assisting in divorce - the accountant, financial planner, and certified divorce financial analyst.
In an ideal world every marriage would end with a happily ever after. However, statistics still show that 50% of marriages will end in divorce. The reasons why marriages end in divorce can vary widely. However, money remains one of the most common causes of divorce. In divorces where money isn't the main cause it often surfaces during the divorce process. Finances play a vital role in one’s sense of security and it is a valid concern during the divorce process. Many different finance professionals have assisted spouses during divorce.
3 Most Common Neutral Financial Professionals in Divorce
A CPA (Certified Public Accountant) has been certified to serve clients as an accounting expert. A CPA helps clients understand past and present-day financial information. They help clients understand the overall tax implications of the divorce settlement. Tax implications can arise when receiving spousal support or dividing a business, retirement accounts, or real estate.
The accountant is usually called upon to understand one specific aspect of the financial settlement. For example, equalizing capital gains tax when dividing investment securities. If an accountant possesses the proper training they can help with the valuation of a business as well. Accountants have also been called upon to find hidden assets in litigated divorces.
The Financial Planner
A CFP (Certified Financial Planner) has been certified to serve as a financial planner. A financial planner helps clients identify their future goals and develop a plan to achieve those goals. A CFP first seeks to understand their client’s short-term and long-term goals. They then gather information to understand their client’s current situation. Such information includes income, expenses, assets and liabilities. Assumptions such as Inflation, interest, retirement age and investment growth rate are then applied to the current situation to determine a future outcome.
The future outcome is compared to the client’s goals. The financial planner will recommend specific changes if their client is not going to achieve their future goals. For divorcing clients, the financial planner helps them understand the divorce’s impact on financial goals. Both the short and long-term implications of the marital property division are evaluated. Common marital assets include items such as a business, pension, retirement account, cash and the marital home. Common marital debts include items such as a mortgage, home equity line of credit, car loans, business debt, and retirement account loans.
The Certified Divorce Financial Analyst
The CDFA™ (Certified Divorce Financial Analyst) typically has a background in accounting or finance and has been certified to serve clients as a divorce, financial expert. A CDFA™ helps clients understand their past, present and future finances as it relates to the decisions made during divorce. A CDFA™ serves as a neutral financial professional in mediation and collaborative divorces. They can also serve as an advisor to one or both spouses during a kitchen table or litigated divorce. When a CDFA™ becomes part of the divorce team they help client(s), attorney(s), or mediator(s) evaluate the overall implications of the divorce, financial settlement.
A CDFA™ will begin by gathering all necessary financial and non-financial information. Such information includes the household budget, income, expenses, assets, liabilities, goals and priorities. Spouses are often unclear about how to begin this discussion and evaluate the marital property. A CDFA™ helps the spouses understand their current, overall financial picture and generates division scenarios that meet each person's goals and priorities. The advisor and spouses review each scenario's income, tax and retirement implications. The spouses then decide which options make the most sense for them and their family. Divorce financial analysts have been called upon to find hidden assets in litigated divorces. If they possess the proper training they have also been called upon to appraise a business.
The financial transition during divorce is personal, unique and often complex. Understanding the ramifications associated with each proposed financial settlement is imperative. These decisions carry a lifelong impact for each spouse. Since there is rarely an opportunity to modify the financial settlement it is very important to get it right the first time. If you would like more information about how a neutral financial professional can help you in your divorce, then please visit our collaborative financial professionals page.