As the first of the month approached, the war between Bill and Sue escalated. Their divorce was not amicable by any means, but, usually, their animosity was a dull roar over who would take the pictures, the furniture and the motor boat– until the mortgage came due. They lived in the same house, Bill in the basement with the dog and Sue everywhere else. Bill could not venture upstairs to Sue’s space, and she could not trudge downstairs to his. But when the mortgage came due, neither wanted to pay for any of it – not their own space, and certainly not the other’s.
So, they stalled. The first day of the month would pass with no payment. Then the second and the third. By the fourth day of the month, Bill would send an e-mail “reminding” Sue to make the payment, and Sue would leave a note on the basement door “reminding” him to do the same, with a sarcastic “DEAR” underlined angrily in black pen. By the sixth day of the month, they unleashed their lawyers. First there were phone calls accusing each other’s client of ill will. Then there were e-mails, letters and faxes. Then the seventh, eighth and ninth days of the month would pass. Still no payment.
On the tenth day of the month, one spouse always caved in: Bill. He would make the payment at lunch, then, after work, mutter past Sue in the kitchen on his way to the basement grumbling an explicative or two and anticipating the day he would no longer be tied to her. If he ever wanted to move out of that basement, he had to protect his credit.
Joint debt is a large source of contention in divorce, second only, in my experience, to children. What seemed like a good idea during the marriage -- that mortgage to buy a bigger home or credit card with a secondary cardholder so both of you could buy groceries and pay bills, for example – feels like the biggest mistake ever during divorce. Inevitably, one spouse insists the other pay, or cannot pay, or simply hoards money elsewhere and refuses to pay. If neither pays, well, you know what happens next: a derog on the credit score.
Join that with a hefty legal bill, a mortgage to refinance, car loans and student loans and personal loans to pay, and your credit score will crash and burn, taking your pocketbook and your sanity along with it and making you crazier than you were during your marriage and divorce.
How can you protect your credit score?
Before Your Divorce
Before your divorce begins, gather your records, find out who owes what, and set guidelines for who pays which debts, when and how. This is your first step and the most important you will take, financially, during our divorce. You must have a frank, open discussion with your spouse about your finances – it is easy for the spouse left in the dark to think the other is hiding money, which leads to the inevitable wild accusations, threats from attorneys, subpoenas for bank records, and thousands spent just to prove you really were, in fact, in debt and had no bank account worth millions in Sweden. (If you think this is incredible you either (1) are not divorcing or (2) are one of the luck few who have not faced these accusations.)
If you maintain a filing cabinet or an e-file for your bills, then start there. Make a copy of each bill (they have a way of “getting lost” or snatched for your spouse’s attorney). Create a spreadsheet that details each creditor, outstanding balance, minimum payment and how to make it, due date, and reason for the debt. Decide which debts you can pay off before you divorce (e.g., a clothing store charge card) and which you can do without (e.g., a monthly gym membership) during your divorce. If you and your spouse are one of the few amicable divorcing couples, use the spreadsheet to negotiate who will assume which debts.
If you are like most people, however, your records are not so immaculate and well-kept. You should order a credit report to determine which debts are in your name, and your spouse should order one, too, for comparison. You may obtain a free credit report each year online at www.annualcreditreport.com. You must supply identifying information, like your Social Security Number, and it will be tempting to order your spouse’s at the same time. Do not. It is a federal crime to order someone else’s credit report without the person’s authorization, even your spouse’s, and you face fines and jail time if you do. See the Fair Credit Reporting Act, 15 U.S.C. 1681n and 15 USC 1681n.
When you have all of the debts and who pays what listed, consider making your payment plans enforceable. Do not expect your spouse to pay one-half the mortgage or her own car loan willingly. You are getting a divorce for a reason, after all. Consider memorializing your payment plan in a writing signed by both spouses and their attorneys and submitted to the judge for entry as a temporary order. An order is a mandatory directive for each spouse to pay particular debts, and it carries with it the threat of contempt. If your spouse refuses to pay her share of the debt, for example, you may ask the judge to hold her in contempt, with all of the fines and punishment and attorney fees contempt entails, to compel her to make the payment and/or to reimburse you if the creditor badgers the payment from you.
However, the same is true for you. Therefore, if your finances are precarious and you will not have the funds to pay your share, you should forgo a temporary order in exchange for (1) a serious consultation with a bankruptcy attorney and/or (2) a prompter property settlement.
When You Divorce
When you divorce, negotiate your property settlement (if you settle your case) or request an order (if you try your case) that reduces the number of joint debts and has serious consequences when one ex fails to pay the joint debts that remain.
If you and your spouse cannot pay off joint debt, transfer as much as possible to the name of the spouse assuming the debt. For joint credit cards, make use of those credit card offers with the zero balance transfers and low introductory interest rates – the junk mail you normally toss out with yesterday’s news – to transfer the debt to individual credit cards. For credit cards with joint debt in just one spouse’s name, award the entire balance to that spouse and credit the spouse, if needed, with an offset of marital property (maybe you keep your entire retirement account, for example, and assume liability for the MasterCard you used to remodel your kitchen). For debt secured by property (e.g., a car loan), award the debt to the spouse taking the property. For other joint debts, require the spouse to seek refinancing ASAP; this might be a conversation you have together with a financial advisor.
If you cannot transfer joint debt to one spouse’s name, be sure your divorce decree specifies, in meticulous detail, each spouse’s responsibility toward the debt. The spouse taking the debt should have a continuing obligation to pay the debt and/or seek refinancing diligently and in good faith. The spouse should also have the duty to hold the other spouse harmless (meaning she will reimburse him) for any nonpayment or other liability that spouse incurs for the debt. The relieved spouse should have a right to inspect all records for payments and refinancing. Include incentives for the taking spouse to pay the debt on time. These could include actual attorney fees and costs if the other spouse has to enforce the decree for nonpayment, liens against property awarded to the taking spouse until repayment, an automatic wage assignment in the event of nonpayment and/or a requirement to maintain life insurance sufficient to pay for the debt until repayment.
After Your Divorce
After your divorce, do not assume you are totally free from the debt your spouse assumed.
A divorce decree that requires one spouse to “assume and hold the other harmless from” a debt does not mean the relieved spouse is never responsible for paying the debt. This is because a court cannot limit the rights of third parties who are not also parties to the divorce. For example, the decree may require your ex to timely make all payments for the boat she or he wrangled from you during settlement negotiations, but if she or he skips a payment the boat company can pursue you. The burden is yours to answer for that debt, because you signed for it. Then, your option is to spend time and money pursuing your ex for reimbursement.
Another option is the credit flag. An ex-spouse whose credit score suffers when the other fails to pay an assumed debt may insert an explanation in his credit report. The explanation should state, at a minimum, that the other is responsible for paying the debt as a result of divorce. See the Fair Credit Reporting Act, 15 USC 1681j. A flag will explain the derog and may mitigate adverse reactions from potential creditors, but it is not a perfect solution. The debt remains unpaid, and you pepper your report with ties to your ex. You must still pursue your ex for your money.
Query: If she cannot pay the boat company, how can she pay you? See, now, why it is important to have that frank discussion over finances first? Otherwise, you may find yourself paying that debt to keep your credit intact, and muttering about like Bill.