Advice for Couples Headed for Divorce After Bankruptcy
Staying married is tough. That's one of the reasons so many people give up.Close joint accounts before you separate or divorce to prevent your former spouse from running up charges and leaving you responsible for the balance. Closing accounts is the lesser of the two evils in this situation. Closing accounts before you separate will make it easier since your spouse is more likely to cooperate with you. Some financial institutions will require the primary account holder to close the account. If that's not you, then you're going to need the help of your soon to be ex-spouse.
But staying together after a bankruptcy is really tough. Not only do you have your personal issues to work through, but you're constantly getting conflicting financial advice that can put you deeper in the hole.
My wife and I made a promise early on in our bankruptcy that the "D" word wasn't allowed to be uttered in our home.
It must have helped.
Although neither of us has been divorced, we were headed in that direction on a few occasions. There was the time in 1995 that Michele stayed in a hotel overnight without telling me where she was. That was a real wake-up call.
But what would I have done if divorce had ever been an option?
I would have started by reading Mistake 24 on page 47 in Do You Make These 38 Mistakes with Your Credit? Here's what it says:
"A divorce decree does not change the fact that you are a co-borrower on a loan. What typically happens is a couple divides their debt with no regard for who is legally responsible for the debt. Each person is still responsible regardless of what the judge says.
Both co-borrowers will suffer if one borrower defaults. So it's best to assume responsibility for all debt for which you were a co-borrower. This will ensure your credit is not negatively affected.
If you are unable to assume responsibility for all co-borrowed debt, it's best to close the accounts.
If you have accounts that you cannot close, refinance them to put them in one person's name.
Closing accounts in this situation is the lesser of two evils. It will lower your scores, but it's better than repeatedly making late payments (refer to Mistakes 11 and 36).
You should also contact your lenders to determine what other options you have."
As I said, a divorce decree doesn't change the fact that you are responsible for any credit held jointly.
When you open joint accounts you and your partner sign a legally binding agreement holding both of you responsible for the account. The divorce decree is another binding agreement between two people who consent to divorce. It does not change previous agreements between you and other creditors.
It doesn't matter to the creditor who actually made the charges (if it's a credit card). It doesn't matter who agreed to pay in the divorce decree. And it certainly doesn't matter to the creditor that you're getting a divorce. The creditor will try to collect from both borrowers.
A word to the wise, don't sign a divorce petition until everything with your jointly held credit is worked out. Promises to fulfill at a later time or by a certain date can be overlooked and expensive to enforce.
What I mean by "worked out" is that all credit held jointly is closed, refinanced into individual names, or paid off to eliminate the debt.
"Worked out" does not mean that your ex-spouse has signed a promissory note or some other legal document promising to pay off debt.
An irresponsible or vengeful ex-spouse can wreak havoc on your credit rating for years after a divorce. It's legal harassment in its truest form.
Bottom line: the best advice I can give you is…
…do not sign a divorce decree until all credit matters are resolved. Signing the divorce decree should be your trump card and a very good reason to make things happen your way.
What I've gleaned from divorced couples I've talked with is that they believe signing papers at the lawyer's office resolves everything. It doesn't.
You need to truly resolve matters, which, as I wrote above, means get your name removed from everything jointly held before you sign the divorce papers. That could mean refinancing, creating individual accounts, paying off debt, closing accounts, or whatever it takes.
The last thing you need are late payments appearing on your credit reports after your bankruptcy is discharged. A series of recent late payments can cripple your chances of getting low interest rates after bankruptcy and keep the dark cloud of bankruptcy hanging over your head well after it should.
If you plan ahead and pay close attention to credit accounts held jointly, you can ensure that your credit reports and FICO credit scores won't get damaged any worse. This is something that your divorce attorney will never tell you about. It's not their area of expertise. They simply don't know what kind of impact a divorce will have on your credit reports and credit scores. And frankly, they don't usually care.
When you're married, it's often easier to just make all accounts joint accounts. Many of us do it without even thinking. However, if you can both agree to have separate accounts in addition to your joint accounts, it can potentially save months and years of frustration for both of you if you do get divorced--or, for that matter, if there's an unexpected death, disability or layoff.
Another situation where things can get sticky is when your ex-spouse files bankruptcy and you don't. The creditors of jointly held accounts that your spouse filed bankruptcy on will come knocking on your door for payment...and eventually may push you into filing bankruptcy (if you haven't already) regardless if the debts that the spouse filed on were in the divorce decree.
Be aware that your spouse's negative narratives may appear on your credit reports and damage your credit. I talk about negative narratives on page 55 of Do You Make These 38 Mistakes With Your Credit?
Here are some credit tips to help you through a divorce:
Establish separate accounts, such as credit cards, gas cards and retail cards. This ensures that both parties are individually responsible for their own accounts, which is valuable in a divorce. The crown jewel out of this is you won't have to worry about re-establishing credit on your own...because you will already have it.
Arrange new individual lines of credit with the same lenders to replace each joint account and transfer agreed upon balances to those new accounts. You want to avoid paying any new charges your ex-spouse makes.
Some creditors will require you to pay off the account before they put it in an individual name. If you cannot pay off the balance, at least try to close the account to prevent any new charges.
It may be wise to have an attorney involved if creditors refuse to cooperate with you. The first thing your attorney will need is a copy of the agreement you signed with the creditor. There are several legal service plans that are cost-effective for this sort of thing.
Try settling the account with the creditor directly by paying a smaller amount than what is owed. The threat of bankruptcy could help your plea. Just be sure you get promises in writing from the creditor. Also make sure they will not report or try to collect on the deficiency balance.
Pay the jointly held bills yourself--then go after your spouse for the money owed.
Of course, you should also find a good and trustworthy lawyer (good luck!) to help you. Obviously, I'm not a lawyer. And none of what I just wrote should be misconstrued as legal advice. My focus here your credit rating.
About the Author: Stephen Snyder is the founder of the After Bankruptcy Foundation a non-profit organization that provides free bankruptcy information and recovery steps. Stephen also writes a free weekly newsletter on bankruptcy recovery.