Divorce, Debt, and Credit Rating Issues

Nothing is worse than starting out a new life with bad credit, but measures can be taken during the divorce to reduce the chances of debt and credit rating woes, according to William Donaldson, a certified financial planner and a certified divorce financial analyst. Donaldson says debt and credit problems are among the costly mistakes that people make in the wake of a marital breakup.

In divorce, a party should obtain a copy of the his or her credit report, which identifies all joint accounts, unknown accounts, and any potential credit problems.

If possible, the divorcing couple should pay off and close all joint accounts prior to the divorce settlement and open new accounts, each in his or her name.

Joint and several liability means that creditors are not bound by the terms and conditions of the couple’s separation agreement that divides joint debt, such as joint credit cards, or auto loans. Each spouse is liable for the full amount of debt until the balance is paid, hence the importance of dealing with this issue prior to the divorce.

Even if the divorce is final, the former spouses may not be exempt from future tax liability. For three years after a divorce, the IRS can perform a random audit of a divorced couple’s joint tax return. If it has good cause, the IRS can question a joint return for seven years.

A divorce agreement should spell out what happens if any additional penalties, interest, or taxes are found as well as where the funds come from to pay for any expenses associated with an audit.

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