RETAINING CREDIT AFTER DIVORCE
A common complaint of loan applicants with credit blemishes is "those
are my ex-spouse's debts, not mine". Unfortunately, often the debt or any
late payments continue to be in "both" names, continues to appear on
both credit reports and can negatively impact one's ability to acquire a home
loan. Here are some suggestions for protecting yourself against potential
credit blemishes when acquiring a divorce. The divorce decree typically assigns
existing debt to the divorcing parties. This can cause confusion because the
unassigned individual may erroneously believe that they are absolved from
responsibility for that particular debt. Not so. A person is not relieved of
responsibility for any debt until the matter has been settled directly with the
creditor.
INSTALLMENT LOANS: While these can include any long term commitment, the
more typical installment debts include the current mortgage(s) and/or auto
loans.
AUTO LOANS: In spite of the fact that the divorce decree may have
assigned vehicles and accompanying debt to the divorcing parties, the creditor
will retain both names on the account and any late payments will appear on both
person's credit reports. The good news is that a lender will recognize that the
person in possession of the vehicle should be held accountable for the
payments. The bad news is that the "innocent person's" credit score
will still be affected and is not easily corrected or improved. Even when all
payments are timely, the debt is still likely to appear on both credit reports.
If you wish to be relieved of the monthly payment (for ratio calculation
purposes) you will have to acquire at least six months of cancelled checks
"proving" that your spouse has made all of the payments.
MORTGAGES: Home mortgage payments can also present a difficulty. If
such payments have been assigned to your spouse via the divorce decree, ask
that cancelled checks be retained and copies provided to you. This will permit
you to demonstrate to the lender that your spouse has assumed the
responsibility for and made the previous mortgage payments. While lenders
prefer a 12 month record of payments having been made by a divorced spouse, at
least six months of cancelled checks will be required in order to be relieved
of the debt for qualification purposes on a new loan.
While the applicant can attempt to have the lender of record remove his/her
name from the mortgage, it is unlikely that they will do so. The only other way
to be totally relieved of the debt is to have the ex-spouse refinance the loan
in his/her name alone.
REVOLVING DEBT: While most revolving debt is generally credit cards,
this could also include other accounts. Again, in spite of the divorce decree's
assignment of debts to an ex-spouse, you are likely to find the accounts still
identified on your credit report.
Most lenders will accept the terms of the divorce decree in regards to the
assignment of credit card debt. Those accounts clearly identified as the
non-applicant's debts will generally be disregarded in calculating the
applicant's qualifying ratios. Depending upon the payment record of the
ex-spouse, one's credit scores can be adversely affected, however.
Unfortunately, seldom does a divorce decree require all joint accounts be
closed and when zero balances are reached, the account to be cancelled.
Most credit card issuers will not remove a borrower's name from the account
as long as any balance remains on the card. Thus, if a separation is eminent,
immediately "close" or "freeze" the account to limit the
extent of the joint credit. Determine how the account is to be paid . . .
notify the card issuer that no more charges are to be made on the joint
account. At the same time, all cards in possession of the
spouses should be destroyed. As soon as the account is paid in full, make sure
the issuer closes the account, never to reissue cards with that account number.
If you are not the one held responsible for debt payment via the divorce
settlement, monitor the payments anyway as your credit could quickly become
negatively affected. It might be possible to transfer the joint debt on a card
to a new indivual credit card, possibly even at a
reduced rate of interest.
In the meantime, have a card or cards reissued in your separate names or
open separate accounts. Be certain that the card issuer uses a new account
number and does not use the old account number in any way. If you do not
qualify for a separate card (a problem some spouses might have upon getting
divorced), contact a card issuer that offers a "secured" credit card.
These cards are collateralized by your own cash deposited in a passbook savings
account.
UTILITY BILLS: The spouse moving out of a common residence should be
sure to have the utilities switched over to the name of the spouse who is
remaining in the residence. You don't want to be surprised in the future with a
collection account because a spouse moved without having paid an account in
full.
There are a couple of other questions that typically arise in regards to
divorce that are not directly related to credit issues.
QUALIFYING WITH CHILD SUPPORT INCOME: While not
required to be shown on a loan application, child support and/or alimony can be
used as income for qualifying purposes. Such income can most easily be
"sourced" if being paid via the District Attorney's office. The other
method of "proving" the receipt of the funds is to provide 12 months
cancelled checks (both front and back). This usually requires the cooperation
of the paying spouse. Finally, such payments must be shown to be likely to
continue for a minimum of three years, meaning children usually can not be
older than 14 at the time of the loan application. The likelihood of the
continuance of alimony is typically more difficult to "prove".
CAPITAL GAIN PROVISION WHEN A SPOUSE HAS MOVED FROM THE HOUSE: Assume
that a spouse has been out of a jointly owned home for over three years. (remember . . . the current capital gains law allows the
exemption if one has used the residence 2 of the last 5 years). If the occupying spouse sells the home (after the normal time
period has elapsed for the "out spouse", can the non-occupying spouse
still claim the current $250,000 exemption? The answer
is yes, but seek tax counsel.
Finally, if you have any questions regarding what you might do to protect and
preserve your personal credit rating, call us at Humboldt Home Loans and we
will gladly provide assistance.
Web Page/Credit & Divorce