Not only can divorce lead to emotional strain, it can also cause all sorts of financial problems. All those shared accounts and co-signed loans that once seemed so romantic are now the cause of major issues.
While divorcing spouses may or may not be willing to work with each other, they need to understand the importance of managing credit during divorce and to understand that any negative changes in credit may linger long after the divorce is final.
- What if there is a late history of mortgage payments?
- What if the home is sold in a Short Sale or is Foreclosed upon?
- What if one party makes a late payment AFTER the divorce on joint liabilities?
These are common everyday questions and concurrences in divorce situations and the more you can educate your clients, the more prepared they are to manage credit during divorce for a successful financial future post divorce.
When joint credit is obtained, a contractual agreement is made to pay the bills. A divorce decree doesn’t change that contract. When clients divorce each spouse remains fully liable for all joint debt as well as their new independent debt.
There are ways to prevent credit obligations from making divorce more difficult, and re-establish independent credit lines:
- Communication between soon-to-be-ex-spouses.
- Ask each company and bank that extended joint credit to transfer the debt to the name of the person who will be responsible.
- Keep joint bills current—even missed payments made years after the divorce will be reported for all individuals associated with the account.
- Ask the credit grantor to remove a spouse who is only an authorized user or close the joint ac-count to additional charges.
- Advise creditors that one spouse is not responsible for debts charged by the other spouse on joint accounts after the divorce.
- Close as many joint accounts as possible.
Failure to make a clean separation of debt and obligations can haunt both clients well after the divorce is final. Managing credit during divorce is critical to future financial success.
Common credit concerns found with divorcing couples:
Mortgage payment is missed. Whether an oversight or intentional, when a mortgage payment is missed there are more repercussions than just a negative hit to the credit score.
- A single 30 day late mortgage loan payment can cause a credit score to drop by as much as one hundred points.
- A single 30 day late mortgage loan payment may prevent one from obtaining mortgage financing from 12 months up to 24 months depending on the loan program and investor.
Marital Home in Foreclosure Proceedings. Many times in a divorce situation there are financial struggles and often times the marital home is involved in foreclosure proceedings.
- If foreclosure proceedings have already begun the best option and sometimes the only option is to contact the current lender/servicer to determine if there is a loan modification or alternative plan to salvage the marital home if this is desired. Once the foreclosure proceedings are underway, new traditional mortgage financing is very difficult if not impossible to obtain. Even if the foreclosure proceedings were resolved, the recent mortgage payment history stated above will be a factor in obtaining new financing.
Joint Marital Debt Retained Post Divorce. When it is currently not possible or not the best option to close out joint marital debt the court may order one party responsible for the full payment of specific debts. When this occurs, the debt is considered a “Contingent Liability” and for mortgage financing purposes, contingent liability is not typically included in the debt to income ratio for the party not responsible for the joint marital debt. But what happens if the responsible spouse makes a late payment on the joint obligation?
- The credit score of both spouses will be affected negatively as both individuals are still liable to the creditor.
- For mortgage underwriting purposes, if the debt was ordered to be paid solely by one party per the Marital Settlement Agreement, the payment history of the debt after the contingent liability was ordered may not be considered by the mortgage underwriter.
- Contingent Liability guidelines are applicable to all joint marital debt including mortgage financing, auto loans, install-ment loans, credit cards, etc
Understanding Credit and the Factors that Influence It.
As you might expect, payment history is the most influential component on credit scores, followed closely by the amounts owed. To lesser degrees, the length of time that one has utilized credit, the number of new accounts or inquiries and the various types of credit accounts held will also have an impact on credit scores.
The overall importance of any of these factors can be further influenced by the entirety of the information contained in your report. As such, certain patterns, occurrences or items can be measured differently dependent on any other factor or combination. There can be great complexity in the way that the scoring formulas work and it’s for this reason that they are difficult to assess.
Making smart decisions related to credit is critical to your client’s financial future. Credit and mortgages during divorce can be complicated – a Certified Divorce Lending Professional (like me) can help explain credit ins and outs to you or your clients.
from the Divorce Lending Association