It is impossible to totally prevent credit damage if your former spouse has access to joint accounts once the divorce is imminent or has begun, unless your spouse is also committed to maintaining BOTH of your good credit. However, there are ways to minimize the risk of credit harm.
1. Obtain a credit report from each spouse as soon into the divorce or before the divorce process as possible. A free credit report is available from each of the three credit reporting agencies each year. Go to www.annualcreditreport.com and order your report. Do not obtain a report for your spouse, even if you have the needed information.
Arrange to exchange the report with your spouse. Compare the documentation. Identify accounts that are in both names. You may be surprised that accounts you thought were just in a single name is categorized by the account holder as joint, because you both have used the account.
2. Develop a plan to close all joint accounts. Having an account that entitles your spouse to charge debt, makes you vulnerable to having the account balance increased without your consent. Therefore, make a list and develop a plan to pay off the joint accounts. Prioritize the list according to the level of interest being charged, with the highest interest accounts receiving top priority.
Your attorney or financial professional can help you develop a plan. Many credit unions offer credit counseling services as a benefit to their members, who can help at little or no cost. Generally, account creditors will not release just one debtor from a joint account while there is a balance due. Check with each account holder regarding what is necessary to either close the account or have it transferred to just one spouse.
Ways to pay off the joint debt, include:
a) Plan ahead. While you and your spouse live together, try to pay off as much debt as possible. Your income, after you separate, will be stretched between two households, making debt repayment more difficult.
b) Income tax refunds or large payments. If you have a large refund coming or one spouse is going to receive a bonus, try to agree to earmark this money for debt repayment.
c) If you have investments, apply this money to debt repayment. It is unlikely that you are earning as much interest on your investments as you are paying on your debt. Use the proceeds from the sale of the marital home or another large asset to pay off or pay down the debt.
d) Consider applying some of your retirement savings to debt retirement. This is highly technical. Confer with your divorce attorney about how to accomplish this.
e) Divide the joint debts that cannot be divided between the spouses, if they can assign the debt to individual accounts that charge 0% interest or very low interest.
f) Remember to close credit lines, such as home equity loans.
3. Monitor open accounts. Keep track of what is being charged on joint accounts during the divorce on the Internet. Do not allow one spouse to increase the balance on the account without mutual consent. If this becomes a problem, confer with your attorney.
4. Contain the damage. Close all joint accounts and only use individual accounts during the divorce to separate charges.
5. Negotiate protections in the divorce settlement. If you cannot pay off the debts from the marital assets, and you have a Settlement Agreement, be specific about the names and numbers on each account and who will be responsible for each debt.
Build in protections in case one spouse fails to meet his/her obligations. Build in time lines for accomplishing pay-offs. If you are required to pay an obligation that was assigned to your spouse in order to protect your credit, have a way for you to be repaid, including expenses and attorney fees.
6. Monitor your credit score. If you are planning to buy a home during or soon after the divorce, you may want to plan closing the accounts after the loan for the home has been approved. However, you have to pay down the balances to qualify for the loan.
7. Come up with a mutually beneficial plan for both of you. If one hurts the other, you will both be hurt.
8. Make monitoring your credit a habit. Keep old reports. Sometimes, old accounts that you had cleared up can reappear. Check that changes that you and your spouse have instituted are being accurately reported. Sometimes you will have to show your detailed Settlement Agreement and Divorce Judgment to convince the credit reporting agencies that they need to correct your report.