The Impact of Credit in Divorce
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.
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
It Takes a Village to Get Through Divorce
“It takes a village to raise a child” is an African proverb that means that an entire community of people must interact with children for those children to experience and grow in a safe and healthy environment.
We have many villages throughout our lives. There is our village through school—including parents, teachers, and friends; a village through our career—mentors, networking groups, colleagues, financial advisor; a village through parenting—aunts and uncles, sisters and brothers, grandparents, physicians, teachers, counselors; and a village to assist with an aging parent—siblings, medical professionals, therapists, geriatric specialists, and community services.
The community support for a family to get through what is one of the most difficult and emotional events in their family life is essential. Divorce is not a do-it-yourself process. It requires support and dedication from friends, family, and professionals. A collaborative divorce team is a group of professionals focused on helping couples complete a divorce with a level of attention, commitment, and dedication to the family needs that the traditional, court-based attorney vs attorney, divorce process does not have.
If you are looking for an interest-centered divorce you will want to expand your village of professionals.
In a Collaborative Divorce model, each spouse has a Consulting Attorney who provides legal advice, advocates for your best interest, and works collectively with other professionals to craft a settlement that is approved by both spouses. Unlike the win-lose attorney approach of court-based divorces, collaborative-trained attorneys guide you with a tone of respect and care towards a goal to empower you to make education-based decisions that impact your future.
For couples with minor children, consider a Family Therapist who is trained to interpret the divorce process through the lens of a child, communicate best practices for handling communications to the children, and assist you with establishing a child-centered parenting plan. Divorce Coaches can assist both spouses with communication flow during intense negotiation sessions and support you while grappling with the grief and anger that comes with dissolving a marriage.
Dividing assets and income in a divorce can be detailed and overwhelming. You may have to make decisions regarding the primary home, family business, retirement assets, stock options, pensions, health insurance, taxes and college expenses. A Certified Divorce Financial Analyst (CDFA®) understands these complexities and will guide you through a process to arrive at a mutually agreed-upon settlement through negotiation. The CDFA® will calculate scenarios to project the short- and long-term impact of various settlement options so you both understand the financial consequences of the divorce agreement.
Depending upon the complexities of your situation, you may expand your village even more. Often, we invite other professionals for advice and guidance including home appraisers, mortgage brokers, CPA’s, business valuation experts, estate attorneys and any other professional who will add value to your understanding of your situation so you can make informed decisions.
Collaborative Divorce Allows for Creative Solutions
The Collaborative Divorce process creates the village needed to accomplish all your goals in your divorce. The process is private, respectful and invites creative ideas and solutions. The specialists in your village have the training, experience, and education, but most importantly have the commitment and compassion that Collaborative professionals bring into the process.
We have resources for you here in Massachusetts
CDRE. Certified Divorce Real Estate Expert
CDFA. Certified Divorce Financial Analyst
CDLP. Certified Divorce Lending Professional
Divorce Coach or Therapist
If you need a referral to any of these services, please let us know. We are happy to help.
