In the world we live in today, credit has become an integral part of our lives. If you want to rent an apartment, obtain a business loan, buy a house, put an addition on your existing home, or do much of anything else (even get a job), you need to have a strong credit history. While your credit score is not a for-sure indicator of financial well-being, it has become almost a status symbol among the citizens of our country. I'm not sure whether or not this is a good thing, but suffice to say, credit is essential to our day-to-day lives.
With that said, a divorce is one of the most critical events of your adult life. How the divorce proceeds and the divorce results will impact your life for years to come in both positive and negative ways. If you are considering a divorce and own any amount of property or debt, then today's blog post from the Law Office of Bryan Fagan, PLLC, is designed with you in mind. We will go over several under-the-radar ways that divorce can impact your credit and how you can prepare for them in advance.
Do not expect an immediate change to your credit score or history.
Just because you have filed for divorce or have had to respond to a divorce petition filed by your spouse, it is not an immediate occurrence for your credit to be changed one way or another. A divorce does not show up on your credit report. FICO (the group that measures and evaluates credit scores in the United States) does not consider a divorce in and of itself while compiling your credit score.
However, if you begin to miss payments on your credit card or are forced to open up additional lines of credit to finance the paying of your attorney, you may see that your credit score begins to dip. The reason for this is that the length of your payment history on your accounts, as well as your total amount of debt, matters a great deal to your credit score. Money is stretched thin in divorce, and as a result, your score may dip, and your credit history may start to bear the marks of a difficult few months I your life.
How your debts are split in the divorce matters a great deal
Keep in mind that your divorce will divide your property and your debts. Debts accumulated during your marriage are considered community debt for the most part. If you and your spouse opened up a credit card or took out a home equity line of credit on your home (HELOC), then those creditors will not care one way or another what your divorce decree says as far as how the debts are divided up. Those folks will continue to expect payment from you and your ex-spouse after the divorce.
Your credit becomes relevant to our discussion if, for instance, your spouse was ordered to take over payments on a credit card after your divorce but fails to make even one payment. The credit card company will contact you; you will tell them about the divorce, settle that issue, and tell you that they still expect payment. Meanwhile, your credit will suffer due to the irresponsibility of your ex-spouse. This is a textbook example of a situation where you may need to consider filing an enforcement lawsuit against your ex-spouse to hold him accountable for his divorce decree violations regarding paying on that credit card after the divorce.
Being unaware of your or your spouse's debts can leave you in a wrong financial position.
One of the first things that I recommend clients do after hiring our office is requesting a copy of their credit report. This can be done once a year for free. This is especially important if you have not seen your credit report in some time. The credit report will go over each of your open and closed creditors and will detail the nature of the debt and the amount of that debt.
You will need this information because if any of those debts are community debts, you will want to disclose them to yourself and your spouse so that you all can work on dividing them in mediation. If you cannot divide them in mediation, a judge will intercede and divide them up after a trial. Crucial consideration must be given, however, that in some divorces, not every spouse discloses all their debts.
If you or your spouse fail to disclose all your debts during your divorce and one of those debts is missed, then you may end up suffering some consequences. Those consequences are often the need to pay on debt yourself that could have been divided equally between you and your spouse. An even more frightening possibility is having a debt taken out in your name that you were not even aware of. Your spouse could have utilized your name and social security number to open up a line of credit in your name for them to utilize without your knowing. I would be sick to my stomach if, after my divorce is discovered this when it was too late.
The bottom line is that it is always wise to run a report of your credit early in your divorce. You may find that nothing is surprising there, which is a best-case scenario. However, you may also save yourself a lot of heartache by discovering a debt or two that you were previously unaware of.
Don't underestimate the impact of a transition from two household incomes to one.
This is a prominent factor that could impact your credit but is often overlooked. Math is math, no matter if you have a lot of income or very little. Going from two incomes to one income will cause lifestyle change. If you and your spouse have not been diligent about living within your means and saving money, then your divorce may be a necessary wake-up call in these areas.
Your mortgage, credit card payments, car payments, and other financed payments are all critically related to your income. If you suddenly find yourself with half (or less) income that you are used to using towards paying your bills, you will likely fall behind on your payments. The next step is your credit suffering and a generalized downward trajectory of your credit status.
My advice would be to set up a budget early in your divorce based on your income alone. Once you have temporary orders in place, you will project out what bills you are responsible for paying and how far your income can be stretched. If you fail to do this and continue to live in the manner you have been accustomed to; your problems will likely worsen.
Stay tuned tomorrow for more examples of how divorce can impact your credit.
I appreciate your interest in this vital topic. While your credit may not be at the top of your list of concerns as you begin your divorce, it is something that you should consider as you enter the process. We will continue to discuss this topic in tomorrow's blog post.
In the meantime, if you have any questions about the information that we covered today, please contact the Law Office of Bryan Fagan, PLLC. We offer free consultations with our licensed family law attorneys six days a week. Our attorneys represent clients across southeast Texas, and we take great pride in doing so. Whether you are just beginning to explore the possibility of a divorce or have recently been served with a divorce petition, our office can plan your case out with you and assist you in achieving your goals.