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With divorce and separation come new experiences and responsibilities. Suddenly phrases like "child support payments" and "100 percent liable for bills" enter the picture. If you ignore your increased financial obligations or fail to separate your accounts, it may be hard to open new accounts and obtain new loans in your name. But there are many moves you can make to protect and restore the good credit that took years to build.
Protect Your Good Credit
Your divorce decree does not relieve you from joint debts you incurred while married. You are responsible for joint accounts — from credit cards and car loans to home mortgages. Even when a divorce judge orders your ex-spouse to pay a certain bill, you're still legally responsible for making sure it is paid because you promised — both as a couple and as individuals — to do so.
The credit grantor (a bank, credit card issuer, mortgage company or other credit-lending business) also has a legal right to report negative information to a credit reporting company if your ex-spouse pays late on a joint account. If your ex-spouse doesn't pay at all, you'll probably have to pay — or the grantor can take legal action against you.
- Close or separate joint accounts. Talk to your ex-spouse, if possible. Analyze all your debts and decide who should be responsible for each. Call your creditors and ask them how to transfer your joint accounts to the person who is solely responsible for payments. However, you still might have legal responsibility to pay existing balances unless the creditor agrees to release you from the debt.
- Take stock of your properties. You may have to refinance your home to get one name off the mortgage, or you might need to sell your home and divide the proceeds.
- Keep paying all bills. Until you can separate your accounts, neither of you can afford to miss a turn paying bills. During divorce negotiations, send in at least the minimum payment due on all joint bills. Miss even one payment and it stays on your credit profile for up to seven years, making it hard to obtain new credit in your own name. Beware of well-meaning friends and relatives who may tell you to ignore making payments or to run up debts. Always make all payments with at least the minimum due.
Establish Credit Independently
- Start small and build up. Get a credit card that has a small credit limit, perhaps from a local department store or financial institution. Then always pay your bills on time so your credit history will be excellent. After six months, apply for another card and continue paying bills consistently. Don't run your debt up beyond what you can afford to pay. It's a winning strategy that's easy to master.
- Ask a family member or friend to cosign. Perhaps a relative or friend with an established credit history can cosign your loan or credit application - provided you repay that cosigned debt on time. Remember, any transaction also will show up on the cosigner's credit profile. After a few months, try again to get credit on your own.
- Consider applying for a secured credit card. You must open and maintain a savings account as security for your line of credit. Your credit line is a percentage of your deposit. Beware of the extra fees you may have to pay for secured credit.
Rebuild a Positive Credit History
You can pick up your pieces and start fresh with a positive credit report - if you pay your bills on time. After all, your credit profile is always evolving.
Your recent bill-paying pattern is critical. Your behavior (during the next 18 to 24 months) is most important in deciding whether you're a good credit risk. Even one late payment can affect your ability to get a mortgage.
Help is available if you're having difficulty paying bills. The nonprofit National Foundation for Credit Counseling (NFCC), 1 800 388 2227, can help you establish a budget and repay creditors. Other organizations offer quality credit counseling as well. Be sure the organization you work with is non-profit, provides budgeting and financial management training in addition to any debt management plan, and does so at little or no cost. Be very cautious of any organization that claims it can provide a quick fix to your credit problems, provides you with no financial management education, or charges substantial fees for its services.
Bankruptcy Is a Last Resort
Bankruptcy should be the last move to make if you get in over your head.
It's not an easy way out. Filing for bankruptcy is no guarantee that it will be granted, because a court judgment must be made. Even if all you do is file your bankruptcy papers with the court, it gets reported on your credit profile.
Not all debts are included in bankruptcy. Things like alimony, child support, student loans and taxes secured by liens still must be paid consistently.
Bankruptcy remains on your credit history for up to 10 years. While a declaration of bankruptcy removes many debts, any reference to filing, dismissal or discharge still appears on your credit history for up to 10 years. During this time, you'll find it more difficult, if not impossible, to get a new mortgage, a personal loan or a credit card.
Mediation can make things much fairer by helping you and your ex-spouse work out a reasonable and equitable divorce agreement. If you'd like help finding a mediator, contact the American Arbitration Association. To locate an attorney, check with your state or local Bar Association.