Dividing Debt & Preserving Credit in Divorce

Many clients express concern about preserving their credit in divorce. Keeping a good credit rating may be important for financing the purchase of a new home, preserving the cash flow of a business, or covering short-term gaps in a household budget. Unfortunately, our courts pay little or no attention to preserving credit in divorce and child support proceedings. There are no provisions in the law to protect credit ratings, so your divorce settlement may be critical to preserving your good credit. These four tips may help protect your credit rating during divorce:

  1. Pay child support on time, or even ahead.
    When child support is paid late, the state reports the delinquency to the major credit bureaus. Paying on time is critical, even if it means paying ahead. In Pennsylvania, child support orders are charged in full on the first day of each month, and then payments received during the month are credited. If the balance is paid down to $0 by the last day of the month, the payor has no problems. If you submit payments by wage attachment twice a month, you probably figure you’re covered, but it is not necessarily true.If you are on a bi-weekly cycle (26 times per year), then each pay period is less than 50% of a month’s salary. Each pay period is actually 46% of a month’s salary. For most months, you will only pay 92% of your support obligation by the end of the month (except for twice a year). You might think it’s good enough to get caught up in the months when you get three pay periods, but it’s not good enough. The state will report your account as delinquent. Make an extra “buffer” payment to avoid credit bureau reporting and other sanctions.
  2. Consider taking your support payment “off-line.”
    Settling a support or divorce case can help to preserve a credit rating by taking the support payments outside of the official state system. This allows the obligor to send payments directly to the support recipient without credit bureau reporting. However, this requires good record keeping by both parties, to ensure there is no dispute over late or missed payments.
  3. Freeze joint credit cards upon separation.
    When spouses get separated, they sometimes play a game of financial “chicken” with their joint credit cards, daring each other to run up the bill. While a divorce court may allocate the debt to one spouse during equitable distribution, at the end of the day, the credit card company does not have to honor the court’s order. The credit card company can collect debts from either spouse – even if the court has ordered one spouse to pay the bill. Worse, the credit card company can impair credit ratings for both spouses if the payments are not made on time. To avoid this problem, the joint credit cards can be frozen or closed, even if one spouse has to transfer the balance to a separate card. Credit cards with “authorized users” often present the same problems as joint cards.
  4. Get your spouse to refinance the mortgage loan.
    When spouses go to court to divide their property in divorce, one spouse usually wants to keep the marital residence. Yet, the residence can be a liability as well as an asset; and whoever keeps it must have the ability to pay, especially if the mortgage loan is in joint names. The court will often award the house to one spouse but leave the mortgage loan in joint names. If the spouse who keeps the house cannot afford the mortgage payment, then the other spouse’s credit rating will be ruined. Settlement is the best way to avoid this result– but when settlement is not possible, you might want to push for the house to be sold.

To learn more about dividing debt and preserving credit in divorce, consult my book Frumkes & Vertz on Divorce Taxation. In Western Pennsylvania, call me (Brian C. Vertz) at 412-471-9000) for a family law consultation or use the contact form.