How to Protect Your Credit Score (Part 2)

By Jennifer M. Paine

Attorney, Cordell & Cordell

Note: Part 1 discussed how to protect your credit score before you divorce. Click here to read. Below is part 2 offering tips to protect your credit score when you divorce and after you divorce.

When You Divorce

When you divorce, negotiate your property settlement (if you settle your case) or request an order (if you try your case) that reduces the number of joint debts and has serious consequences when one ex fails to pay the joint debts that remain.

If you and your spouse cannot pay off joint debt, transfer as much as possible to the name of the spouse assuming the debt. For joint credit cards, make use of those credit card offers with the zero balance transfers and low introductory interest rates – the junk mail you normally toss out with yesterday’s news – to transfer the debt to individual credit cards.

For credit cards with joint debt in just one spouse’s name, award the entire balance to that spouse and credit the spouse, if needed, with an offset of marital property (maybe you keep your entire retirement account, for example, and assume liability for the MasterCard you used to remodel your kitchen). For debt secured by property (e.g., a car loan), award the debt to the spouse taking the property. For other joint debts, require the spouse to seek refinancing ASAP; this might be a conversation you have together with a financial advisor.

If you cannot transfer joint debt to one spouse’s name, be sure your divorce decree specifies in meticulous detail each spouse’s responsibility toward the debt. The spouse taking the debt should have a continuing obligation to pay the debt and/or seek refinancing diligently and in good faith. The spouse should also have the duty to hold the other spouse harmless (meaning she will reimburse him) for any nonpayment or other liability that spouse incurs for the debt.

The relieved spouse should have a right to inspect all records for payments and refinancing, and include incentives for the taking spouse to pay the debt on time. These could include actual attorney fees and costs if the other spouse has to enforce the decree for nonpayment, liens against property awarded to the taking spouse until repayment, an automatic wage assignment in the event of nonpayment and/or a requirement to maintain life insurance sufficient to pay for the debt until repayment.

 

After Your Divorce

After your divorce, do not assume you are totally free from the debt your spouse assumed.

A divorce decree that requires one spouse to “assume and hold the other harmless from” a debt does not mean the relieved spouse is never responsible for paying the debt. This is because a court cannot limit the rights of third parties who are not also parties to the divorce. For example, the decree may require your ex-wife to timely make all payments for the boat she wrangled from you during settlement negotiations, but if she skips a payment the boat company can skip her and pursue you. The burden is yours to answer for that debt because you signed for it. Then, your option is to spend time and money pursuing her for reimbursement.

Another option is the credit flag. An ex-spouse whose credit score suffers when the other fails to pay an assumed debt may insert an explanation in his credit report. The explanation should state at a minimum that the other is responsible for paying the debt as a result of divorce. See the Fair Credit Reporting Act, 15 USC 1681j. A flag will explain the derog and may mitigate adverse reactions from potential creditors, but it is not a perfect solution. The debt remains unpaid and you pepper your report with ties to your ex. You must still pursue your ex for your money.

Query: If she cannot pay the boat company, how can she pay you? Now do you see why it is important to have that frank discussion over finances first? Otherwise, you may find yourself paying that debt to keep your credit intact.

 

Note: Part 1 discussed how to protect your credit score before you divorce. Click here to read.

 

Jennifer M. Paine is an Associate Attorney in the Detroit, Michigan office of Cordell & Cordell. She is licensed to practice in Michigan, and has been admitted pro hac vice in Illinois, Ohio, and the United States Court of Federal Claims.

Ms. Paine received her BA in English and Mathematics from Albion College and graduated Summa Cum Laude. She received her Juris Doctorate from MSU College of Law and graduated Summa Cum Laude.

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