A divorce does not affect an individual‘s credit and credit score directly. However, shared or joint credit obligations often do. Joint credit obligations include bank loans, credit cards, finance and auto loans, mortgages, home equity lines of credit, and credit cards. Fortunately, there are several things that a person can do before, during, and after divorce to ensure that their credit and credit score is not negatively affected by divorce.
During marriage, many couples merge their finances, get a mortgage, open a joint bank account, buy a car together, etc. Under New Mexico law, all assets and debts accumulated during the marriage are considered to be community property. In the event of divorce, all assets and debts considered to be community property are divided equally between spouses.
However, many divorcing individuals fail to realize that a divorce decree assigns marital property and debt, but does not alter or break contracts with a lender.
For example, if one partner is assigned a specific debt and subsequently cannot afford payments and the lender has not changed the contract, late payments will appear on both individuals‘ credit reports. In other words, regardless of the divorce decree, an individual is still responsible for joint credit obligations unless certain steps are taken.
- Close joint bank accounts. Joint bank accounts should be closed before the divorce is finalized. Since joint bank accounts are considered community property, spouses should close or cancel the account together and the funds should be divided equally.
- Close or remove one person from credit accounts. If there is no balance due on a joint credit account, the account should be closed prior to divorce. If there is a balance due on the account, it is not likely that the creditor will close the account without payment. However, certain credit companies will be willing to close a joint account and open two separate individual accounts and divide the balance due.
- Settle with creditors. Other creditors may be willing to close the account and settle for a lesser amount than what is due. In this case, individuals should obtain a letter from the creditor stating that the debt has been paid in full.
- Freeze accounts if they cannot be cancelled. If joint accounts cannot be closed, cancelled, or settled, it is important to put a freeze on the account to prevent any further charges from either party.
- Change names on utility bills. It is important for the person keeping the marital home to remove the other party‘s name from utility bills.
- Keep current on bills. Even though a divorce decree may assign a particular debt to one individual, if the debt is a joint one, the other party‘s credit score will be affected if the party responsible does not make timely minimum payments. In this case, it is often advisable to make the minimum payments even if the debt was assigned to the other spouse instead of risking damage to your credit score.
- Establish your own credit. Many spouses, for several reasons, do not have a credit card in their name. It is important to be aware that being an authorized user on another person‘s credit account does not build personal credit. When faced with divorce, some individuals find that they have not established sufficient credit to accomplish even the simplest tasks like obtaining a telephone line or renting a home.
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These issues should all be considered early and throughout the divorce process. An experienced divorce attorney can help to avoid or at least minimize the potential negative consequences to your credit related to your divorce.