February 1, 2017
Divorce can have so many effects on your clients; on their lifestyle, on their emotional state, on their family life. With some planning and forethought, you can minimize the effect on their credit and maybe even improve their credit score.
Pre-divorce, a couple may have maintained several credit cards and satisfied the minimum payments so that they have good credit scores. But careful consideration should be made to divide cards so that the obligation for making payments falls to the right person.
First, it is wise to have your client pull their credit report as well as their credit score. The report will show every credit card that is open and the ownership status – is the card owned individually or jointly, or is the person an authorized user? The form of ownership is important: the user is responsible for the balance on an account held individually or jointly, but not if they are an authorized user.
Another advantage of the credit report review is that it reveals all cards with account balances, so that no card is overlooked in the divorce process.
It’s a good idea to leave the marriage with no joint debt. Even if a divorce decree places the responsibility to pay off credit card debt with one spouse, the credit card company can legally come after the other spouse. It’s better to retitle the liability and place it squarely with one party or the other.
First the parties should agree on who is responsible for each credit card balance. Remove one of the cardholders from any joint cards, and remove a spouse who is an authorized user. Some credit card companies will not remove a joint holder. In this case unlink the spouses by transferring the joint debt to a new card in the name of one spouse alone.
If a card liability needs to be split between spouses this can be accomplished by transferring a portion of the balance to a new credit card. Other solutions include juggling around other cards or other loans, or compensating the spouse who takes the full balance with liquid assets.
Authorized users can remove themselves from the account by simply calling the credit card company.
If new credit cards need to be established, it’s a good idea to open them before the divorce is finalized. If a new card is secured while still married the card applicant can include the other spouse’s income on the application, making it easier to qualify for a card or for a lower interest rate.
The sooner joint cards are separated the better. During the divorce process card balances can increase quickly when one spouse decides to do some “revenge spending” without the other spouse’s approval, or take a cash advance. A spouse who feels wronged might stop making card payments as punishment to the other party. This could ruin the good credit rating of your client.
Make sure your client assumes a debt load he or she can handle. If credit card debt or other loan obligations are weighing down your client – which is sometimes a factor leading to divorce – suggest they work with a financial planner to create a plan to become debt-free.
