If you were the stay at home parent and your credit score is not as strong as your spouse then you may have some issues to deal with in context to your divorce. Your credit score defines the strength of your purchasing power in the market. It indicates the strength of your ability to repay someone who has provided you “credit”.
If your mortgage is in your name then any payments made against that mortgage strengthen your credit score. Same concept applies to credit cards, a home equity line of credit and virtually anything that relates to paying off an obligation to a third party (not a relative or a friend). The more money that is listed in your name as an obligation where you have a scheduled payment due (e.g. credit card) and you do not incur a default then your credit score can become stronger. The same holds true for the opposite profile where, in an extreme example, you have nothing in your name and the payments are “credited” to someone else (your spouse) which do not build your credit.
So, what does this mean in context to your divorce?
You may not be able to acquire a lot of things you want from various service providers without a credit score that has been built up over the years. The examples are endless as life can be complex. In context to a divorce, you may need to:
- Move out of your existing home and obtain a new mortgage for your new home
- Refinance your existing home to lower your monthly mortgage payments
- Gain access to an equity line of credit and access some cash for home improvements
- Take out some financing for new furniture if you need to move out of your marital home
- Take out a loan (or a lease) for a new car
- And the list goes on
When you get a divorce, you have a lot of moving parts that require you to interact with people in the market. Without a strong credit score you may be challenged to get the services you need from other people. You will have to either build up your credit over time, borrow from friends and family who know you and are less concerned about your credit or forego the opportunity to acquire products or services from the market at least for the short term. Read on as there may be another alternative to take into consideration for your divorce.
Seek out co-signors to substantiate short term credit
A co-signor is someone who will vouch for your credit and take the responsibility to pay off an obligation you are not able to pay on your own. If you have a co-signor and you default on a payment the service provider will go after the co-signor as the obligor for the payment. Many people look to the people they have a strong relationship with in their lives to function as a co-signor. Yet, what many people miss is the opportunity to build in your soon to be former spouse as a co-signor for your future purchases. Your soon to be former spouse is the person who did not allow you to have anything in your name which impacted your credit. So, why not build in terms and conditions within your divorce decree to access the credit of your soon to be former spouse. This can be an involved process yet usually worth it. Otherwise you will be constrained from doing many things in your life.
Convert your lack of credit into money for your divorce
This can be a tricky process but possible to do. If you do not believe you can get your spouse to be a co-signor of your future obligations then you will want to consider translating your lack of credit as part of your divorce negotiations. You would need to figure out the difference in your credit scores and how much this translated into money that could be accessed from various service providers as a result of having strong, or less than strong, credit. This amount may be over a course of years and provide you with some strong negotiating power. This assumes the silently discussed terms of your marriage prevented you from being gainfully employed or building your credit. A situation where the couple silently agreed for one spouse to be raising the kids or available for the children is a classic example where this would apply.
In context to a divorce, credit is another form of currency. When one spouse’s credit has been compromised that currency needs to be addressed during a divorce proceeding.
About the Author
Larry Smith CPA, MBA
Larry is a Founding Partner of Divorce Outcomes, a specialty professional services firm that analyzes, architects and negotiates all of the financial aspects of a divorce.
Since 2003, Larry has worked with divorcing parties as their fiduciary to design sophisticated divorcing strategies that enable clients to preserve and create wealth from their divorce. As a technical financial expert, he uncovers hidden tradable components through various analytical and architectural processes to arrive at desired outcomes. He is an alumni of KPMG and Andersen and has expertise in:
- technical accounting, taxation, business consulting, risk management, M&A
- forensic analysis, performance analytics
- M&A, business valuations, divorce management, family equity transfers, multi-party negotiations, communications management
- advanced process engineering, cognitive performance technologies
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in a divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients:
- manage their divorce process
- uncover hidden financial risks
- architect divorce solutions
- manage ever-changing negotiating positions
- communicate complex financial matters
- close the divorce process as soon as possible
Throughout the process we evaluate our clients’ current wealth-at-risk and architect desired outcomes to best preserve or create wealth.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.