Divorce and Your Credit: Consider the Pitfalls before Co-Signing a Loan

It is natural for married couples to do almost everything together. After all, marriage is a partnership and one that is built on trust. Because of that, few people would hesitate to enter into a joint contractual or financial arrangement with their spouse. And while that may be fine as long as the marriage lasts, it could prove troublesome if the union ends in divorce.

Consider the co-signed loan. By co-signing a loan, you become legally responsibility for the debt should the person holding the loan default. What happens in a divorce if your ex, who holds the loan, fails to pay? Is there any way you can force your ex to live up to his or her financial responsibility? Unfortunately, there is not. (1)

In a divorce decree, debt obligations can be distributed much like property. A judge can stipulate which spouse is responsible for which debt. The husband may get the mortgage while the wife gets the car payments for example. While a judge can state that the spouse holding a loan obligation is the responsible party, that is not how creditors look at it. (2)

When payments are late or missed, creditors hold all parties who signed the loan responsible. So, if your ex-spouse does not fulfill his or her financial responsibility, it will be reflected on both of your credit reports. (3)

There are a number of reasons a person would default on a loan following a divorce: not being able to cope with new budgetary constraints; being unfamiliar with handling monthly financial obligations; and, in some cases, even revenge. Even though a judge may have made it clear in the divorce decree which party was responsible for which debt, only a creditor can release a person from their fiscal responsibility. (2)

Perhaps the best way to ensure your credit rating won’t be adversely affected by your ex-spouse’s debt obligations is to have joint debt refinanced under one person’s name. However, that is not always possible. One partner may not have the credit rating or income requirements to satisfy creditors. Larger debts, like mortgages, can take more time than practical to refinance before the divorce is finalized. (1)

An alternative option would be to establish online accounts so that you can monitor whether or not your ex has been meeting his or her obligations. While this will not get you off the hook, it could help you avoid a black mark against your credit rating. (2)

Keep a careful watch for is identity theft as well. It is not just computer savvy strangers who hack your personal information to steal your identity. In fact, 50% of identity theft cases, according to a survey by the Better Business Bureau, involve relatives and others close to the victim. Spouses are privy to all types of information – birth dates, social security numbers, bank account numbers – that can be used to fraudulently open an account in their ex’s name. If you suspect this may be the case in your situation, request that the credit bureaus place a fraud alert on your reports. (2)

(1) http://www.today.com/money/can-you-force-ex-spouse-pay-loan-you-co-signed-8C10996034
(2) http://www.credit.com/life_stages/overcoming/Divorce-Survival-Guide.jsp

(3) http://www.transunion.com/personal-credit/credit-issues-bad-credit/cosigning-a-loan.page