By Maria Hinerman
Feb 7, 2014Divorce can not only be emotionally painful, but it can also affect your finances. All shared accounts and co-signed loans suddenly become the cause of major issues, especially large loans and mortgages. And it is how you handle these financial obligations that can determine if and how your credit scores change.
How to ensure your credit stays in good standing:
Divorce degree and your debt
It is important to understand that a divorce decree does not change your financial obligations to your creditors. However the obligation to pay the debt is arranged, through settlement or court order, both spouses must ensure that the party obligated to pay the debt makes the payments. If the payments are late or missed, both spouses will end up with a negative item on their credit reports resulting in lower credit scores.
Closing accounts
It is best to close all joint accounts before you divorce. These accounts will include car loans, credit cards, bank accounts, etc. Arrange new individual lines of credit with the same lender, or replace these joint accounts by transferring agreed upon balances to the new account. For accounts that cannot be closed due to a high balance, request that a freeze be placed on the account. This will prevent any further charges until you can figure out how to proceed or pay the amount owed to close the account.
Managing shared accounts
There may be some accounts that you cannot close until they are paid off. In order to manage those shared accounts, set up the accounts online. This allows both spouses to monitor the account activity, and allows both parties to ensure that there are no late penalties or late payments reported to the credit bureaus. Car Loans can be titled in the name of the spouse who will retain the automobile, and that spouse can refinance the auto loan in their name only.
Breaking up the mortgage
Usually, the mortgage is the biggest liability a couple has, and divorcing a mortgage is not easy. The following are 4 ways you can divorce your mortgage:
- Selling the house. This is the easiest way to put this joint debt behind you. Make sure you consult a real estate agent that can be flexible to work with both spouses and their lawyers, in case of negotiations and separate signing times.
- Loan Assumption. This is when one of the borrowers assumes the mortgage and just continues to make the payments on the loan.
- Refinance. This is when one of the borrowers is removed from the loan and the title deed, and the remaining borrower simply refinances the home. The single borrower must be able to be approved for the loan on their own.
- Cash-Out Refinance. This is when one of the borrowers is removed the loan and the title deed, and the cash-out received is used to buy out the other borrower. This is often used by the other borrower as a down payment for a new home, or to help settle debt.
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