In most instances, there is a reason why an individual's credit score is subprime. The most utilized form of credit scoring, FICO, is done on a range from 300 points to 850 points, with 850 representing a "perfect" score. Generally speaking, any FICO credit score of less than 720 is considered "subprime." If your score is less than 720, you may pay more in a variety of financial transactions.
One of the most common causes of a subprime credit score is the fallout resulting from the end of a marriage. We recently had occasion to sit down with Amy Hoch Hogenson, an attorney with the law firm of Paule, Camazine and Blumenthal in St. Louis, Missouri, to get her perspective on the effect of divorce on individual credit ratings. Amy concentrates her practice on complicated divorce cases (involving high conflict custody, and business valuation), as well as modifications, enforcements of judgments, adoptions, paternity, and grandparent’s rights cases.
Q: What are the most common financial problems you see people experience as a result of going through a divorce?
Amy Hoch Hogenson: Cash flow is a major problem. Couples must continue to make payments on what may be significant accumulated debt. Then, following a physical separation, they often find themselves short of cash as they take on the costs of a second household. . Credit card debt and debt to third parties may increase and must continue to be paid for despite the cash shortage.
Q: What are some of the behaviors that you see on the part of the parties to divorce that either cause or contribute to credit-related problems or exacerbate those problems?
Amy Hoch Hogenson: If the couple spent money extravagantly during the marriage, they may find themselves in financial distress. In order to maintain the lifestyle, they may have accumulated significant debt. In some cases, they can no longer afford the payments, and the parties default on their obligations.
We find that people in that situation may invade their savings or retirement accounts, or go to a family member or other source and borrow money. The debt they were able to manage, perhaps with difficulty, during the marriage has now significantly increased, and the court that is handling the divorce is going to have to somehow determine who is responsible.
It is important to understand that even debt accumulated while the parties are separated is considered marital debt, since it was incurred during the marriage. However, if one party utilizes those funds for their sole benefit and the use of those funds did not benefit the marriage, it could be argued that the person who benefited is responsible for that debt. As a result, people are leaving the marriage with not only less cash and income, but also with greater debt.
Q: Let's talk a bit more about marital debt. Let's say that the divorce court allocates responsibility for certain marital debt, like a credit card, to a husband or wife, or perhaps even more commonly, the parties to a dissolution of marriage agree to take responsibility for certain debts. In that instance, does that court order or agreement between the parties mean that the creditor who the debt is owed to can only collect that debt from the party that is ordered or agrees to pay it?
Amy Hoch Hogenson: No.
When someone incurs a debt, they sign an agreement with the creditor to pay the money back. Married couples may take on debt individually or jointly. A judge ordering someone to pay a debt may not pay attention to how the debt was taken on. That can mean, for example, that the husband can be ordered to pay a joint debt or the wife is ordered to pay the husband’s debt. The creditor, however, is not involved in the divorce case and is not bound by the divorce judgment. The creditor only cares who obligated themselves by signing the note in the first place.
If the person ordered to pay the debt fails to do so, the creditor has the right to sue the person who signed for the debt in the first place. At that point, the person who was not ordered to pay the debt can ask the court to enforce its order by holding the person who was ordered to pay the debt in contempt.
To prevent the paying party from discharging this debt obligation in bankruptcy, it is important that there be a provision in the judgment saying that the debt is “non-dischargeable” in a bankruptcy proceeding. This provision will allow the non-paying spouse to seek recourse for payments and possibly even attorney’ fees.
Q: If you were to give your typical divorce client just on piece of advice about how to protect themselves financially during the process of going through a divorce, what would that one most important piece of advice be?
Amy Hoch Hogenson: Knowledge is power. So three things:
1. Keep a list of your assets and debts in a safe place. If you don’t know the details of all of your accounts, including your spouse’s retirement, bank, credit card, or other accounts, that’s okay. You may want to consider asking, or keep copies of paperwork even if it is outdated showing account numbers of bank and retirement accounts.
2. Look at your credit report regularly so that you know if your spouse has taken out debt in just their name or have taken out debt “jointly” without your knowledge.
3. Depending on your state or local court rules, consider monitoring your joint accounts and credit cards or, if there is no prohibition, consider closing certain credit card accounts to prevent accumulating debt.
That’s some really great advice from Amy. Amy’s practice is limited to Missouri and the comments are specific to Missouri only. If you are going through a divorce or contemplating filing for divorce, make certain that you discuss these issues with your attorney. Diligence on your part, as well as on the part of your attorney can help you to avoid serious damage to your credit score.
THE CHOICE OF A LAWYER IS AN IMPORTANT ONE AND ONE THAT SHOULD NOT BE BASED SOLELY ON ADVERTISING.