How to Protect Your Credit in a Divorce?
It’s common knowledge that a divorce can be a difficult and painful process for anyone. It represents an end to a way of living you may have grown attached to, which in turn, can take a heavy toll on your emotional and mental health. A divorce can also wreak havoc on your finances, particularly your credit.
When your credit score takes a hit because of the divorce proceedings, this can have a significant impact on your life and financial well-being post-divorce. It can affect your ability to qualify for a credit card, a home loan, a car loan, and even your ability to refinance an existing mortgage.
Listed below are a few things you can do to prevent this from happening.1. Run Your Credit Report
Run a credit report during the divorce proceedings and scrutinize every credit card or loan item in it. There may be a credit card under your name that your spouse used without your knowledge—the balance will have to be settled during the settlement.
Generally, it’s best to close all joint credit card accounts before finalizing the divorce to avoid this issue altogether. This will also protect your credit score from the effects of untoward spending.2. Close Joint Bank and Loan Accounts
There are loan accounts like a car loan or a mortgage that can’t be closed right away; be sure you and your spouse settle on mutually-favorable terms when dividing these debts. This of course, may not be possible in a contentious and litigated case. You may need the Court to make some of these decisions for you if you are unable to reach an agreement.
As for the marital or family home, the most convenient way to avoid any tax and mortgage liabilities in the future is to sell the property and use the proceeds to pay off the mortgage in full. You can use whatever is left to pay off your joint debt. Remember, if one spouse insists on keeping the family home and taking care of all future mortgage payments, you are still on the hook for late payments, which will ding your credit score. In the eyes of lenders, what matters is whose name/s are on the mortgage, regardless of any changes in their marriage status.3. Get a Credit Card Under Your Name
With only one source of income (yours) after a divorce, you need to brace yourself for a mandatory lifestyle change. A credit card under your name can be a lifesaver if you’re short on cash to pay for bills, utilities, and home expenses. The key is to apply for a credit card while you are still married so you can take advantage of your spouse’s income and meet the credit card company’s income requirements. Of course, this would be a credit card in your own name, but the idea is that you can use your spouse’s income as part of the “household” income.4. Plan for Your Future Cash Flow Needs
As early as now, you can talk to a financial planner to determine your cash flow needs in the future and determine how much debt you can keep relative to your income (i.e. your debt to income ratio). If you have existing credit card debt or a high-interest loan, you may have difficulty paying it off with just one source of income, in which case it may be necessary to sell off some of your assets to settle your liabilities.
If you are going through a divorce and your current financial status appraised, schedule a consultation with Austin family law attorney Daniella Lyttle to discuss your financial and legal options. Call the Lyttle Law Firm today to find out how we can help you.