Written by Jay Mota, CFP®, CDFA®, WMCP®, ChFC® 

When going through a divorce, it is likely that changes will occur in your credit report and scores. One of the first things to do when considering a divorce or starting the process of divorce is to pull your credit report from all three credit bureaus to understand what debt is listed on your credit. There are three types of liability. Individual, which is your sole debt. Joint, which is debt for which both people are responsible and authorized users, which it is not necessarily your responsibility to pay, but the behavior with this account could impact your credit. When you are listed as an authorized user, you have little control over the impact unless you are removed from the account because it is not your account.

Here are some topics I am often asked by clients in a divorce:

1. How is debt divided in a divorce? Are you protected from your spouse’s credit card, medical debt, student loans, and other debt?

It is important to note that depending on the state the divorce is in (because each state varies), debt can be handled differently. Most states are equitable distribution states (fair by not exactly equal distribution), and there are nine states that are community property states (AZ, CA, ID, LA, NV, NM, TX, WA, and WI). Alaska, Tennessee, and Dakota are optional states. To add more complexity, not all equitable states and community property states treat divorce the same way. In fact, courts in different counties or judges may act differently.

In most cases, if the debt is joint marital debt or if the debt is under one spouse’s name but accrued during the marriage and used for marital purposes, then the debt can be considered marital. Marital debt is usually negotiated and paid off through a settlement or by selling the asset it may be associated with. Separate debt, which is debt brought into the marriage or obtained after the date of separation, typically the date of filing for divorce, is usually treated separately and the responsibility of the spouse who incurred the debt.

When it comes to medical debt, this falls under what is known as the Doctrine of Necessaries. In this situation, both parties are responsible for paying for necessary services provided to either spouse.

For student loan debt, if obtained while married and living in a community property state, the debt can be considered marital however, loans obtained before or after the marriage are the borrower’s responsibility. It is not so cut and dry in an equitable division state. If a loan was taken before the marriage or after separation, then it is usually separate. However, if taken during the marriage, a judge may examine what the money was used for, such as living expenses or tuition. Other factors that may impact this decision are length of marriage, income, and who benefited from the loans. Lastly, student loans are sometimes refinanced for a lower interest rate, and if the spouse co-signed, then it will be a marital debt.

It is important when considering divorce to know what you will be and are going to be responsible for. An easy way to do this is first to determine if you live in an equitable division state or community property state. Second, pull a credit report for all three bureaus from a reputable source and view what is on your credit report to determine the person’s responsibility on the accounts. There are usually three types of responsibilities: individual, joint, or authorized user. It is important to note that no matter what the resolution is with your divorce, creditors do not care. If you are not responsible for the debt by way of divorce settlement, you are still responsible for the debt to the creditor. So, if the settlement places responsibility on the other spouse and the debt is not paid, the creditor can still claim the debt if not paid. A good way to avoid this is to make sure that debt is paid during the settlement with assets of the marriage. The only recourse if a debt is not paid by a responsible former spouse is to go back to court.

2. How many years does it take to rebuild credit?

This is like the eighth wonder of the world. No one can tell you exactly how the algorithm works. There are multiple factors that contribute to credit scores. Again, as previously stated, when contemplating divorce, it is important to know the timing and how to be prepared. The one caveat to this is safety. If safety is an issue, get out, get safe, and worry about this later. If you have time, you want to work with someone who can guide you on how to prepare for divorce so you are not surprised afterward. Additionally, divorces take time, so you can utilize this time to get your life after divorce in order.

Here are the factors (for the most part) in a FICO credit score.

1.      Length of credit – if your oldest accounts are marital and closed through the divorce, then you have to start all over, and it is just time that is needed to re-establish the length of credit. This usually represents 15% of your credit score.

2.      Percentage of debt owed to your available credit limit – It is not just one account either. If you have a total amount of $30,000 in available credit and owe $10,000, this is not bad, but if accounts will be closed after the divorce and these are the accounts representing a good portion of the $30,000 of your available, your total line of credit may drop pushing you to a very high ratio. This will have a negative impact on your score. This can also happen because of a bank lowering your credit limit due to impacts to your score from the other factors. This, however, will have a 30% impact on your score.

3.      Payment history – A good payment history is the most important piece to your credit score. 35% of your score is derived from payment history. It is important to make sure payments are made on time through the divorce process. If you are listed as a joint or an authorized user on an account, you may think that this is not important, but just because you are not responsible for paying this via the divorce, if payments are not made and the account is later closed through the settlement, the closed account will still appear on your credit with a negative payment history for seven years from the date of last activity.

4.      Credit mix – the type of credit you have, such as a mortgage, auto, store credit cards, revolving credit cards like Visa or Master Card, and personal loans, all impact your score as well. The credit algorithms like to see that you have a mix of credit and can manage different types of debt. This, however, only has a 10% weight on your overall score.

5.      New Credit or Credit Inquiries – When there are a lot of inquiries on your credit in a short period of time or new accounts, this sends up a red flag that something could be wrong. This is especially impactful if there is not a long credit history. This factor has a 10% weighing on your credit score.

To make matters worse, there are numerous different algorithms used to determine a score. You may have one score to purchase an auto and another for a credit card. Experian and Equifax have 16 different FICO scores, and Transunion has 21. Vantage is another scoring model that you often see from free credit reporting websites or banks. It is important to note with Vantage that the weighting criteria, although the same, has different weight percentage to the score. Just a tip, when applying for credit, ask what score is being used so you can be prepared when you apply for credit. This may be helpful to know before applying so you can determine if another lender uses a better scoring algorithm for your scores.

Like everything else, everyone’s situation will be different, and there is not one answer for all. Being proactive and tactical could be the difference between having good or bad credit after a divorce. I will say that it is very likely that a divorce will impact your credit scores, especially if there are new accounts being opened and others being closed.

3. What should you do if you want to divorce, but your spouse is in a lot of debt?

When thinking about divorce, you must take inventory of assets, incomes, and debts. I advise my clients to answer the 4-Ws and H.

1.      Who – took out the line of credit?

2.      What – is the type of credit?

3.      When – was the credit started?

4.      Why – was the credit obtained?

5.      How – has the debt been paid during the marriage?

Knowing this information will allow you to chart out what will be and will not be your responsibility during and post-divorce. Timing is an essential element to divorce again unless safety is an issue. If you haven’t already started the process, it is wise to know what your financial position will be before you engage in the process to avoid issues that could lead to lingering problems for you.