Due Diligence. Sort out finances before you part

Most couples today are unaware of how to deal with matters that concern their credit worthiness post-separation.

For those going through a divorce, the legal formalities occupy so much of the mind space that they may easily overlook the implications of their joint financial obligations. For instance, if a couple decides to seek divorce, they will sign all the legal documents it takes to complete the official process.

However, if they overlook the loans they had taken together, it will result in a string of overdue payments, which will impact both their credit scores. This will make it difficult for them to take a new loan in the future.

Settling finances in a hurry can further complicate the situation. However, it is important to sort this out in order to ensure that there are no financial complications when it comes to obtaining credit for either of them in future. It is advisable to approach your lenders and explain the situation clearly. They will educate both the parties of their respective liabilities.

You will not be responsible for any credit obtained by your ex-spouse if it is solely in the latter’s name. However, you will be responsible for any credit or loan taken jointly by both you and your partner.

Managing liabilities, post-divorce, can pose problems. So, here are four things you need to keep in mind to manage your finances better during a divorce.

Any action on the part of the ex-spouse can damage the partner’s ability to apply for a fresh loan; this can affect the credit score. This is why it is crucial to evaluate all credit documents, like credit reports and credit scores to check for loans that have been taken individually or jointly by both. The couple should then individually inform their lenders of the situation, and ensure all documents are updated.

Sometimes, the only solution to a joint loan could be to work together to pay off the debt. For instance, in the case of a joint home loan, it may be difficult for just one individual to refinance the entire loan.

Often couples overlook the importance of dissolving joint accounts. Even if joint loans have been paid off, future credit transactions of the partner will still be affected by those of the ex-spouse if the joint accounts aren’t closed. This is because lenders share all joint account information or mention the guarantors to the loan for all transactions associated with the person. For example, post-divorce, if the ex-spouse defaults on a loan, it will reflect in the partner’s credit report.

Post-divorce, partners will pay their bills separately, which is why it is important to establish credit independence. While small bills can be paid out of your income, big payments will have to be made with the help of loans. It is recommended that individuals keep their credit limit low to ensure they don’t overspend. This will protect their credit health, while also helping to build a good credit history over a period of time.

Post-divorce, it is important to maintain a good credit score through prudent borrowing and timely payments. Pay attention to your bill payments. The financial behaviour of divorced individuals two months after separation is crucial in determining the person’s credit risk and subsequently their credit score.

Along with making vital familial decisions, couples heading for a divorce must give serious thought to the financial issues on hand. While sorting out an individual’s financial profile is vital, it is even more important to pay attention to financial obligations where the couple have signed as joint applicants, or where one of the members has signed as a guarantor. This will ensure neither of the partner’s credit scores is affected.

The writer is Managing Director, Experian Credit Information Company of India Pvt Ltd and Country Manager, Experian India

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