5 Ways Divorce Can Hurt Your Credit Score

Considering divorce? Also consider the hit to your finances and credit

Image Source: Karsten Bitter

Divorce is a major life event that affects your emotions, your family and, very importantly, your finances. The divorce itself won't damage your score, but the way your debts are divvied up as well as any asset transfers, alimony, and child support that come out of the split can impact it. Today we take a look at five ways that divorce can ultimately impact your credit score, ruin your finances and increase your everyday expenses.

#1 Cost of the divorce process 

The expense of going through a divorce can be significant and, the more acrimonious the split, the more costly the process will be. Just covering the cost of attorneys can rapidly drain your savings and you'll both lose out by giving your lawyers lots of money. This loss of cash reserves can lead to financial problems like paying bills late or maxing out credit cards that can lead to a hit to your credit score.

#2 Expense of splitting homes

Your incomes combined may have been adequate to run your joint household and service your debt, but you may find that splitting into two households pushes your budget to the max. This can lead to similar problems of tapping into savings, engaging in debt spending on credit cards and stretching your finances so thin that even a little hiccup can be a disaster which can lead to serious credit problems.

#3 Debt or expenses not split equitably

Often debt and household expenses may not be split fairly or in accordance with your ability to pay. It will likely come down to the skill of your lawyer, how hard you're willing to fight, and the opinion of the judge which may not align to what is “fair.” If you end up with more debt in the divorce agreement than you can afford to service, this can lead to financial problems that will then lower your credit score.

#4 Ex-spouse does not meet responsibilities

Whomever the divorce assigns a debt to does not change the obligation with the creditor - whoever signed the agreement is on the hook. So if your ex is told by the judge to pay a certain debt, but does not and it was a debt you signed for, you will be held accountable. Your ex not paying the debt will then lower your credit score and, if you can't afford to take up the slack, things could get really bad for you.

#5 Lack of joint debt

If most of your debts are in your spouse's name, that may seem like a win for you, but what it also can mean is that you have no substantial credit profile of your own. This can make it tougher to get new credit, may mean you may have to take higher interest credit to establish a profile independent of your spouse and, if you can't properly service that debt, you can end up lowering your credit score instead of raising it.

How to protect your cash and credit in divorce

The first thing to try and do is amicably work out your finances and the terms of your split between the two of you before you bring in an attorney. If you can agree to all the terms, you can hire an attorney to prepare the paperwork and then go into court to get a sign off on a no-fault divorce agreement. The less time with lawyers and the court, the more money you'll save.

Second, if you are neck deep in debt, living paycheck to paycheck, and are delinquent on some of your bills, it's likely not going to get any better after you split. If your debts are significant, you may want to file bankruptcy as a couple and then get a divorce. That way you both start your new lives with a clean financial slate. This often works out better than a divorce then a bankruptcy.

Third, once the divorce and/or bankruptcy is final, you should immediately start to rebuild or improve your credit as individuals apart from the debts you had in your marriage so that you are on stable, independent financial footing. And if your ex is servicing any debt that your name is on, be sure to monitor it monthly to make sure it's being paid on time and won't cause you any problems.

Contact the Law Offices of John T Orcutt to find out about the timing of bankruptcy if you're over your head in debt and also considering a divorce. Call +1-833-627-0115 for a free consultation in Greensboro, Raleigh, Fayetteville, Garner, Wilson or Durham.