The Impact of Credit in Divorce Finance
While going through a divorce, a credit score might seem like the smallest concern, but a surprise drop can undermine all progress being made toward the resolution of the real estate side of the case.
Lenders do not give divorcing spouses special treatment, so it’s vital to understand how credit can tank a buy-out or new purchase that is otherwise secure.
Whether or not a divorcing spouse will be able to qualify for a mortgage and secure housing is tied to their credit score, so they will need to know how to protect it while going through a divorce. Here are five things to keep in mind as a divorcing spouse plans a new future.
Factor in Joint Debt: Mutual debt can impair future financing because both sides are impacted even though only one side might be making payments. For example, if one spouse is court-ordered to pay a particular debt (mortgage, credit card, car payment etc.) and doesn’t make the payments on time—or at all—the other spouse’s credit is still negatively affected. This will potentially affect both spouses’ credit, so that when a spouse goes to buy a new home or secure a new mortgage on the existing home, they may not be approved.
Divorce Itself Creates Debt: Divorcing spouses will also often use credit cards to pay attorney fees, and max out joint cards that way. This, in turn, affects both their credit ratings and subsequent ability to qualify for a mortgage moving forward. The longer the divorce process, the greater impact that this can have on their credit.
Know When to Sever: Spouses should sever their joint credit lines, while staying aware of how it will affect their individual credit scores in the short term. They will be able to rebuild their credit in the long term, but severing credit lines upfront (and especially once all accounts are clear and paid up!) can avoid many issues down the line. Identity theft between spouses is also quite common, so it’s important to sign up for credit/fraud monitoring. This way, they can keep an eye on any court-ordered joint payments, and make sure the other spouse is keeping up with them.
Avoid Bankruptcy, Except as a Last Resort: While it can be a tempting quick fix for many, it has long term repercussions. Debt settlement can be a better option to repair and preserve their credit score, if it is available.
Be Aware of Current Options—and Their Impact: COVID has created many changes to financial situations, including Paycheck Protection Program (PPP) loans, forbearance, Economic Injury Disaster Loans (EIDL), and more. While these programs can be vital for economic recovery, they can have unexpected impacts on credit. Spouses should make specific note of which programs they have used, so that they can investigate what results there might be. Additionally, spouses might have accepted a forbearance without telling the other spouse, making it vital to stay in close contact with the mortgage company.
Credit can impact every divorce and can make it more difficult to move forward to a new life. By acting early, divorcing spouses can mitigate the effects and move forward in a better financial situation than they otherwise would have faced.