While a good credit history and score are important at any time, this is especially true after a divorce when you might be shopping for a new mortgage lender, opening your own credit accounts, and learning to support yourself on a single income after sharing household expenses for months, years, or even decades. If you are concerned about how divorce might impact your credit, a divorce lawyer from The Millard Law Firm may be able to review your particular situation and help you evaluate possible options to safeguard your credit. Consider contacting them at (678) 319-9500 to schedule a confidential consultation.
The Difference Between Separate and Marital Debts
Some debts are considered marital while others are considered separate. Separate debts are generally those that a spouse had before the marriage or that they assumed as part of a valid marital or prenuptial agreement. In contrast, marital debts are generally those that are used to purchase property that benefited the marriage. The court will determine which debts are marital and subject to division if the spouses cannot agree on this issue.
How Is Debt Divided in a Georgia Divorce?
Like assets, debt is divided equitably in a Georgia divorce. This means that debts are fairly, but not necessarily equally, divided. Often, the debt will follow the asset. For example, if one spouse is awarded a car, that spouse will also be responsible for paying the car note. In some situations, the debt may have to be paid off, or new debt may have to be acquired, to pay the other spouse for their interest in the property. If one spouse stays with the marital home, they may have to refinance the property and buy out the spouse who will not be living there.
If the divorcing spouses can reach an agreement about how to handle their debts, they can include this information in the settlement agreement. In some cases, the spouses may agree that they will each be responsible for marital debts undertaken in their own name. Alternatively, they may agree to a timeline for paying off joint debts, or they may provide other language in their settlement agreement that makes it clear who is responsible for each debt. If they cannot reach an agreement, the court must decide an equitable way to divide the debts and the marital property.
Effect of Divorce on Your Credit
Getting a divorce does not automatically decrease an individual’s credit score. However, divorce often has a significant impact on a person’s financial situation and can result in less income to manage current expenses and debts.
Examples of How Divorce Can Negatively Impact Your Credit
While the divorce itself does not impact a person’s credit score, the actions they or their former spouse take after the divorce may have a negative effect on their credit score. Here are a few examples of how credit may be negatively impacted after a divorce.
Your Ex Does Not Pay Their Debts
Even if the divorce decree says that a person’s former spouse is responsible for paying off certain debts, it is important to keep in mind that the creditor was never a signatory to that agreement. Therefore, the individual is still just as liable for the debt as their former spouse. The creditor can pursue either spouse for payment and negatively report on their credit record if the spouse declared responsible in the divorce decree does not pay the debts the court ordered them to pay.
You Have To Refinance Your Home
If one spouse stays in the marital home, they may be taking on a bigger debt relative to their income than they did before the divorce. Additionally, mortgage applications involve a hard credit inquiry, which can cause a temporary reduction in credit score.
You Have Trouble Paying Your Bills
If your household changes from a two-person income to a one-person income, you may struggle to pay your bills. This could result in late or missed payments, both of which can harm an individual’s credit.
Your Creditors Might Reduce Your Credit Limits
Creditors may check if a person’s income has changed and reduce credit limits when a lower overall household income is reported. Even for an individual carrying only a moderate amount of debt, their credit limit being lowered will increase their debt-to-income ratio, which will reduce their overall credit score.
Ways To Take Care of Your Credit After a Divorce
If someone is going through divorce, they can take proactive steps to protect themselves financially and try to emerge from the divorce in the most stable financial position possible. While there are no guaranteed ways to avoid a credit score decrease, these things may help reduce the decrease.
Paying Off Joint Debts
Resolving a divorce in a way that allows each spouse to sever themselves financially from their ex is often a priority in divorce arrangements. Some individuals may find it beneficial in the long-term to sell off the marital property and use the sale proceeds to pay off the balance of jointly-held debts. This creates a cleaner break than many of the alternatives, and helps protect individual financially from any financially irresponsible behavior on their former spouse’s part.
Continue Paying Your Bills on Time
According to the Consumer Financial Protection Bureau, one factor that may be considered in determining an individual’s FICO score is their payment history. By creating and maintaining good habits like paying their bills on time, individuals can better protect their credit scores. Timely payments indicate to potential lenders that a person is capable of maintaining a regular payment schedule and paying off the full amount of loans or credit card usage.
Creating an Accurate Post-Divorce Budget
Individuals must also consider their budget after their divorce. Their income and their household expenses alike can be expected to change. By preparing a detailed and accurate post-divorce budget, individuals will be more informed about their financial needs. A divorce lawyer may be able to advocate for an individual’s interests and work for solutions that will properly address them.
Including Clear Language in Your Divorce Decree
To ensure that debts are properly paid by the responsible party, it is important that the divorce decree provide clear language about which debts each spouse is responsible for, as well as the consequences if they do not properly take care of them. An experienced divorce lawyer from The Millard Law Firm can include such language in your settlement agreement.
Establishing Your Own Credit History
While married, some people may have relied on their spouse’s credit and not invested much time, thought, or budget into building their own. As such, these individuals may need to start building their own good credit history, which may start by taking out some new accounts once the divorce is finalized.
Creating an Emergency Fund
One financially savvy move to take regardless of an individual’s financial situation is to create an emergency fund. Having funds in reserve can make it easier to deal with problems that arise without having to take on cumbersome debt. The National Foundation for Credit Counseling provides educational materials about how to create emergency funds.
Contact Us for Help With Your Divorce Case
Many people worry about their credit after a divorce. A knowledgeable divorce lawyer from The Millard Law Firm may be able to explain your options during the divorce process and assist you as you enter the new chapter of your life with more clarity and confidence. Consider calling (678) 319-9500 to schedule your confidential consultation.