You have struggled with the emotional and psychological issues of our divorce and now it’s time for the financial side. You have assessed your outstanding credit obligations as well as your assets and have decided to divide them equally, each of you walking away with the responsibility of paying off specific debt. You think you have finally come to an agreement so you settle and move on to start a new life. You work hard over the next few years and start putting money away to get you a new home. You think you’ve made it, found a perfect opportunity, so you go to the bank and ask to qualify for a mortgage, then comes the bad news “you don’t qualify due to poor credit history”. How can this be? You have paid everything off and your spouse should have taken care of his/her share, or have they? This can be devastating news when so much time has been spent trying to get your life back in order. So what went wrong and how cold this happen?
Financial matters are one of many issues that can drive couples apart. Often one partner is the spender while the other is far more frugal and watches every penny. You can also have two parties just as equally devoted to their finances but with one individual less knowledgeable who just goes along faithfully with whatever their partner agrees to. Whatever your situation is unless you understand your assets as well as your credit obligations in the marriage you could be in for a big surprise.
During your marriage you and your partner will apply for credit cards, share lines of credit, take out a mortgage, sign on car loans, and hold various other joint liabilities such as “buy now pay later plans”, and possibly investment loans. All these facilities get reported to the credit bureau on a regular basis from the respective lenders. The credit bureau also keeps track of other mutually responsible transactions like cell phone plans, legal judgments against you, collections, as well as bankruptcies and consumer proposals. So what does this mean? All this reporting and updating is being done to establish your individual credit worthiness or ability to repay debt. This comes disguised in the form of a credit report and further revealed as a credit score to would be lenders. So why is this important?
When both partners are disclosing their respective assets and liabilities, many times they forget items that ere taken out years before and have never been used or loans that may have been signed for but now don’t recall the transaction. So you both decide that your agreement will make each party responsible for the pay down of specific debt, normally if it’s a debt associated with a particular asset like a car, it will go with the individual who keeps the car. The problem however, occurs when both parties have jointly signed on a credit obligation and only one of you agrees to keep up the payments. If you signed on that car loan as well, then what happens if your partner stops paying. Although you think you have an agreement in principle your lender will not see it that way and should your partner stop making payments not only is their credit rating affected but so is yours. Those cell phone agreements, maybe both of you signed on the contract now one of you rakes up a huge bill and decides not to pay for it, you guessed it, it becomes you problem as well. That joint line of credit you took out years ago and never used and forgot about, guess what the other party has now decided to use it and not pay it back, you may not get those collection calls because you may have relocated but that first visit to the bank will give you a new reality check. All these lapses in repayment and unpaid credit wreak havoc on your credit rating as well as your credit score, which is an indication of your worthiness to potential lenders. In other words, can they count on you to repay the debt on time and without missing any payments? So how do you protect yourself?
The first step is get informed, understand what family liabilities exist on your credit report, order a copy usually a paid copy is best because this will give specific details on the type of liability and the ownership of that liability whether it is individually held or jointly held. This is often not undertaken by either party and leaves open the possibility of not reporting or closing out old and unused joint credit, leaving an opportunity for potential misuse by either party. Do an inventory on all the credit cards, lines of credit, purchase plans and other charges against your name. If you need help, see the assistance of a Financial Divorce Specialist to help you make sense of it all and guide you through the process.
For all joint liabilities, you will need to make sure that the lender will either re-write you out of the loan or credit obligation and if not you will need to make arrangements to get this facility paid out from family assets and closed. You take a big credit risk by not doing this because you will not be able to protect yourself should the other party not fulfill their end of the bargain leaving you with deteriorated credit and the inability to borrow, rent or with the employers wanted credit checks more often could keep you from getting a job. This holds true for your mortgage as well, make sure it is re-written and that the individual keeping the home can qualify to carry it on their own, other wise you may have no option but to sell the property. Don’t leave yourself exposed to potential credit meltdown, know where you stand and don’t just settle…Settle Smart!
Jo-Anne Fiore, BA, CFP, RRC, FDS
Smart Split Divorce Solutions
Profession: Financial Divorce Specialist, Family Mediator
Tel: 647-367- 9229
jfiore@smartsplitdivorce.com
www.smartsplitdivorce.com