A divorce can impact your ability to secure credit simply because you may no longer have the income you had when you were married. Here are five tips to maintain a good credit score and protect it for the future.
1. Know your credit score and what affects it.
Your credit score report can be obtained for free (just one per year) through one of three credit bureaus: Equifax, Experian or TransUnion. Your score is determined by your payment history, outstanding balances, history of using credit, the type of credit used and how many inquiries into your credit happen throughout the year.
Keep in mind that it’s good to have a credit card or other credit and to use it occasionally to maintain your access to future credit when needed for a car loan or mortgage, for example. If you had joint credit accounts with your spouse, your credit score may or may not need a little boost after the divorce based on the factors mentioned above.
#2 Eliminate obligations where possible.
A credit card or statement with your name on it does not make you a joint owner of the account. Unless the account was originally opened with an application signed by you, you may only be an authorized signer and you can request to have your name removed from the account immediately. If your former spouse is named on the account as an authorized signer, have his/her name removed to avoid any future charges.
#3 Close joint accounts or freeze future charges.
If there is no balance on a joint account, call the creditor and close the account, noting that this may temporarily affect your credit score. If you are in the process of applying for a loan, however, ask your lender if you should close joint accounts at that time or wait until you have the loan in place to avoid jeopardizing the loan.
If there is a balance that cannot be paid off right away on a joint account, call the creditor and request to freeze the account from any future charges. You can pay off the balance over time without incurring additional debt.
#4 Transfer balances to the responsible party’s individual card.
For debt that you are not responsible for, request that your former spouse transfer the remaining balance to another credit card in just his/her name. If they are unable to pay their share of the debt, payments still need to be made so that the account doesn’t default and your credit score isn’t affected. Make sure that you are receiving copies of all statements by requesting duplicate copies.
#5 Pay your bills on time, no matter what a judge says.
Divorce decrees do not override account agreements with your creditors. Both spouses are liable and responsible for joint debt regardless of who the judge ordered to pay the bill. If accounts default, then both spouses can be sued or have their wages garnished. One 30-day late payment can drop your score 25-75 points and it takes months to get those points back.
If you have trouble maintaining current accounts during or after your divorce, consider debt counseling to better manage your finances and preserve your credit score for the future.
This article sprouted from a series of brainstorming meetings that I recently had with fellow Collaborative Attorney Bruce Peck. We decided to meet for coffee from time to time to discuss and share ideas for writing about any alternative topic that may come to mind that would be different from the usual topic of divorce.
One reason people seek a divorce (in Minnesota, what we call Dissolution of Marriage) is because they start to think that they cannot trust their spouse financially. So they feel that unless they divorce their spouse, they will face a mountain of debt because of the careless way their spouse handles money.
If you are feeling that way, you may be experiencing something like the following circumstances. Do you view your spouse as untrustworthy with money? Is your spouse spending too much money? Does your spouse gamble too much? Do you worry that your spouse will take on significant debt without your knowledge or consent? Does your spouse make terrible financial decisions? These financial concerns often lead to divorce because one spouse feels that the financial issues in their marriage are out of control and they cannot go on that way and have no other choice. One spouse feels that they can’t take on the financial risks involved in staying married and that divorce is the only option to save themselves from financial ruin. In these circumstances, divorce is not the only potential option you should consider. One alternative to divorce is a “legal separation”.
In Minnesota, a legal separation may be granted by a court when the court determines that “one or both parties need a legal separation.” Arguably, avoiding financial ruin is a good reason to need a legal separation. This is because a “legal separation is a court determination of the rights and responsibilities of a husband and wife arising out of the marital relationship.” Further, a “decree of legal separation does not terminate the marital status of the parties.” In other words, a legal separation is everything a divorce is, without calling it a divorce and without actually divorcing the couple.
People who have a legal separation in Minnesota are actually still married to each other. So, if you want to stay married, but determine all the rights and responsibilities of you and your spouse in a court order, just like in a divorce but without divorcing, then you might be interested in a legal separation instead of a divorce. In my experience, legal separations in Minnesota are quite rare. Usually, if a couple wants to separate their financial lives by determining their rights and responsibilities, they also want to be free to marry someone else if they decide to do that in the future. That rules out legal separation because if you are still married, you can’t get married to someone else. Even if a spouse has no intention of ever marrying again, they typically do not want to be married to their current spouse.
With a legal separation, a person is still married and so they cannot marry someone else. I suspect that the only reason that there is such a thing as legal separation in Minnesota is that there have historically been people whose religious beliefs prevented them from even considering divorce. While many people still have an aversion to divorcing, I haven’t run across many people recently who still hold divorce as completely inconsistent with their religious views. The only two reasons that I can think of to get a legal separation are 1) you want to get a divorce, but your religious beliefs don’t allow you to divorce, or 2) you want to stay married as long as you can separate your financed from your spouse so that financial issues don’t come in between you and your spouse.
There are some possible negative consequences and limitations of a legal separation. One is that your health insurance eligibility may be affected. Another may be the issue of how your change in marital status may affect your taxes. Another is that any joint accounts you have with your spouse are likely still at risk. There are additional issues to consider related to bankruptcy and debt collection. This is not meant to be an exhaustive treatment of all the positive and negative aspects of legal separation, but this gives you a sense for the potential issues to consider in making your decision.
In order to choose legal separation over divorce, you should consult with a bankruptcy attorney, a family law attorney and a tax accountant and think through your options thoroughly before making a decision. The Collaborative process is ideal for helping couples talk through and make these decisions with the help of legal (and other professional) advice readily available to both spouses. An alternative to legal separation, without going through with a divorce, is to complete a postnuptial agreement. This is like a prenuptial agreement (which is commonly referred to as a “prenup”), but a postnuptial agreement is signed after the couple is married (rather than before marriage). It is an agreement about the financial rights and responsibilities of the couple if they ever separate. This is a whole separate topic and is too large for this article. I’ll write more on the topic of postnuptial agreements in another blog post soon!
During and after a divorce, tax matters take on new importance since your financial circumstances have probably changed, as has your filing status. If you were in charge of tax returns during your marriage — and especially if you were not — keep these tips in mind to support the best possible outcome when filing your annual returns.
Some legal fees are deductible.
While most court costs and legal fees for obtaining a divorce are not deductible, some are, including:
- Fees paid for tax advice related to a divorce
- Fees paid to determine or collect spousal maintenance
- Fees paid to determine estate tax consequences of a property settlement
- Fees paid to professionals if the services were completed to verify the accurate amount of tax or to assist in obtaining spousal maintenance (appraiser, actuary, etc.)
- Who will itemize mortgage interest, real estate tax, charitable contributions and other itemized deductions?
- Who will claim any dependent children’s exemption and tax credit?
- Who will take any long-term capital loss carryover?
- Who will claim any quarterly estimated tax payments made during the year?
- Who will report investment income from joint accounts?
For Minnesota families, summer feels different than other times of the year in more ways than just the warmer weather. Because most kids don’t attend school year round, the summer months can present unique scheduling challenges. This is especially true for families headed by two wage earners, and even more so when parents have gotten unmarried. For a school-age child, the summer routine often includes a mix of camps, classes and lessons, latchkey programs, vacations and sporting activities, with many logistical issues to be resolved. This is “times 3” if there are three kids in the family! The start and end times of kids’ activities vary week to week, and tend to not conveniently coincide with the work hours of the parent on duty.
That’s a lot of moving parts for families in which parents are getting unmarried. Managing complicated logistics is especially stressful if kids move from Mom Island to Dad Island without a safe and reliable bridge between the two. This is one reason why Collaborative Team Practice is designed to help parents establish the best possible co-parenting relationship after a divorce or break up. This always makes it easier on kids, but it can also be a huge benefit for time-challenged parents, and for the support network of extended family, baby sitters and carpool parents who can be resources for kids without having to be in the middle.
Here’s the rub: establishing an effective co-parenting relationship isn’t easy. An effective co-parenting relationship relies on clear communication, cooperation, reasonable flexibility and courtesy, and these elements can be in short supply during the painful end of a marriage or partnership. The Collaborative guidance and support of a neutral child specialist to create a Parenting Plan and a neutral coach to create a Relationship Plan are important resources toward the goal of effective co-parenting. We know this hard work can be invaluable for your family in the future. You and your kids deserve to enjoy all the summers to come. 
In a recent collaborative divorce case, we learned from the clients that a tax liability of about $60,000 would be owed if they did not get their divorce by the end of the year. It was only a few days before Christmas and past the informal deadline set by the court for submitting final documents for a 2013 divorce. Adding to the challenge, my client had just changed her mind about a key provision in the financial settlement.
I had already prepared and circulated a draft of the agreement which had been reviewed by our clients and an expert who had helped them with planning and financial issues concerning their special needs child. Now it all seemed to be unraveling and I fought against the urge to find someone to blame and prove it wasn’t me (I bet these thoughts crossed the minds of the clients and others on the team). Instead, we got to work on the problems as a team.
The attorneys met with the expert concerning the special needs child and reviewed her suggested changes, made phone calls to our clients for approval, and drafted the new changes into the agreement. The child specialist who had worked with the clients during the collaborative process reviewed the suggested changes and made adjustments in the parenting plan which would be part of the final legal document.
We also had some preliminary conversations with our clients about the proposed change my client wanted in the financial settlement and shared our clients’ views. The proposed change concerned the timing of the sale of real estate and the neutral financial expert who had worked with us during the collaborative process had been contacted about this issue. We checked calendars with the clients and the financial neutral and scheduled a meeting–unfortunately, the husband’s attorney was not available at the only time which worked for the rest of the team and the clients. We agreed to meet and the attorney for the husband would be available during the meeting by phone and email.
We also needed to get a judge assigned to our case. The Joint Petition, which had been prepared in the beginning of the collaborative process, was filed with the court, which got us an assigned judge. The attorneys discussed strategy and we agreed that the husband’s attorney would take the lead in the calls requesting an expedited court process. There were a number of complications, including the fact that the judge was leaving on vacation that day. I listened in on the calls and was happy to hear that the judge’s clerk, after consulting with the judge, agreed to email the agreement to the judge once it was filed and the judge agreed to review it while on vacation.
We still needed a final agreement on the financial settlement. At the meeting the next day, the financial neutral took the lead and discussed the consequences of the proposed change, which would also affect the funding for education for their children. Options were considered and discussed. I was present at the meeting but had agreed on a ground rule with the other attorney that I would refer to her all questions of substance from her client. As we developed the terms of the final agreement, the substance was shared with that attorney in phone calls and emails. I prepared the final draft of the agreement with the new terms, the clients and attorneys (one by email) signed, and it was filed with the court that day after an all morning meeting. The judge signed the final document and the clients were divorced in 2013.
The key reasons for our success in working through the challenges:
1) The clients and professionals focused on solving the problems rather than assigning blame for the problems.
2) Clients and professionals relied on the strengths and expertise of different members of the team.
3) Trust among professionals allowed for flexibility and candor in the process.
4) Clients kept uppermost in mind the big picture goals for the family as a whole.
A divorce is not only an emotional event, it is a financial event. As the year ends, people often focus on tax implications of divorce. Being planful and mindful of taxes may benefit both spouses moving forward. Having a good collaborative team can help you work through tax issues and make the best financial decisions possible.
Here are some things to think about regarding taxes and divorce:
If you are still married on December 31, you can file your taxes jointly as married–even if you are divorced by the time your taxes are due. You may want to work together to determine the best overall tax scenario and work together to save the family the most money possible in a given tax year.
- You may want to include language about the tax consequences for your last year of marriage in the decree. Clarifying that any liability or refund for that year is shared, could save you effort later in the year when one or both of you have a claim to the other’s refund/liability.
- The IRS does not care about the specifics of your property division. Unless it is explicitly in the decree, the IRS will not consider whether one of you received more property in exchange for less tax liability. The IRS operates on its own and you should obtain attorney advice on tax liability before finalizing the divorce.
- You may want to look at the tax implications of filing as Head of Household v. Single post-divorce. Who will claim the dependent exemptions? Do the exemptions need to accompany other benefits claimed such as healthcare reimbursement or child care benefits? Taking the time to think through these issues before finalizing the divorce could save you time and money later.
When parents think about divorce, thoughts often go to their children. How do we tell them? Will they adjust to having two homes instead of one? How will we pay their expenses? Will my ex and I be able to communicate well enough to co-parent effectively?
This is unfamiliar territory, and thinking about these questions can feel overwhelming. Having a team of experienced professionals supporting you as you and your spouse move through the divorce process can make it less scary. In addition to having your own attorneys, the Collaborative Process uses neutral specialists who assist you in answering questions like these.
How to tell our children about our divorce?
A neutral child specialist helps you create a “we statement” for telling your children about your becoming unmarried. Your children will remember this moment for the rest of their lives, so you want to do it together, thoughtfully and with intention. The child specialist continues to work with you and your children in creating a parenting plan unique to your kids’ ages, needs and personalities. As part of your parenting plan, you and your spouse can agree to return to the child specialist for guidance if parenting issues arise in the future.
How will we pay for our child’s expenses?
A neutral financial specialist assists you in putting together a plan for sharing your children’s expenses. Rather than relying upon a generic child support calculator, you and your spouse openly discuss your children’s future expenses. For some couples, contributing to a joint children’s checking account makes the most sense. For others, having each parent take responsibility for certain expenses is more practical. By having a healthy discussion, you and your spouse can come up with a plan that fits your unique situation.
Will we be able to communicate effectively for our future needs?
A neutral coach helps you and your spouse understand and manage your emotions during the divorce process and can also guide you in methods to improve your post-divorce communications. Avoiding these conversations can leave you feeling angry and resentful, making it impossible to fully enjoy future events such as holidays, graduations, and weddings. By finding a way to move forward with your life with a positive attitude, you will make your children’s lives easier as well.
If you are interested in learning more about the Collaborative Process, visit our website at www.colllaborativelaw.org to schedule a free consultation.
A recent article in the New York Times suggests that big-money divorces provide lessons for less-wealthy couples. Regardless of a couple’s income or net worth, several questions are common to most marriage dissolutions, including:
- How can we create a parenting plan that will benefit our children?
- How can we divide our assets fairly?
- How can we maintain control of divorce costs?