One common concern many people have when starting the divorce process is “will divorce effect my credit rating?” The short answer is no. Just because a divorce has been filed does not have any effect on a person’s credit rating. A problem can arise, however, when bills go unpaid, either because there is no clearly defined agreement as to who will pay, or because there are bills that are unknown to one of the parties.
It is important to obtain a credit report when starting the divorce process. A credit report will reveal all the accounts for which a person is responsible and will reveal any accounts that might otherwise be unknown. A credit report will also show any joint accounts. It is usually the joint accounts that cause the most problems. This can occur when one of the parties has opened a joint account without the other parties’ knowledge. This can generally happen in two situations.
First, many times the parties have a joint account already, such as a checking account or a loan with a bank. The documents that were signed for the joint loan or joint checking account contain a cross-collateralization provision that encumbers any assets either party has with the lender, making both parties responsible for the debts of the other. One party will then obtain another loan with the same lender without letting the other party know. If that party fails to repay the loan, the lender will use the cross-collateralization agreement to collect from the other party. This often results in a bad mark on the credit report of the innocent spouse.
The other situation occurs when one spouse signs the name of the other spouse to a credit application. Although not as common as the first situation, the results can be just as devastating. It is difficult to remedy such a situation as most lenders consider your spouse to have the authority to bind you to certain agreements.
It is important to have a clear understanding of who is responsible for paying which bills. Such an understanding should occur either prior to a divorce being filed, or as soon after it is filed as possible. If the parties are unable to agree, then the court can make the decision.