LIFE EVENTS WILL AFFECT YOUR CREDIT SCORE (Part 2 — Divorce); OR HOW TO DIVORCE WITHOUT RUINING YOUR LIFE!
The trick is to know what should be in place to maximize the best outcome for all involved.
Lets touch on Divorce next. Although I have published comments on this subject in the past I feel it is necessary to expand and keep the content fresh.
Divorce can be really messy, so the first thing both parties need to come to understand is that how your finances, credit and assets are managed through this process could easily hurt your access to capital, and your ability to get new financing at decent rates, if at all, for years to come. Uncontested divorces are covered by Legal Shield. Click here then Personal Legal Plans for an informative video.
Real property mortgage, automobiles, credit cards, and anything else that is currently not at a zero balance are the liabilities that need to be addressed here.
Liabilities assigned by the courts does not remove the tradeline from credit reports. Joint accounts that have high balances, or incur Lates and Charge-offs will adversely affect the credit profile and scores of both parties.
Revolving credit lines have the potential of three different categories (e.g., Joint, Individual and Authorized User). An Individual credit line is of no concern to the second party; a Joint account should be paid-off, the cards shredded never to be used by either party again, or the account closed (closing an account will affect credit scores of both parties); Remaining an Authorized User has advantages and dis-advantages assuming this party no longer uses the account. Being an Authorized User, and as long as the account is in good standing, and utilization stays under 30%, has a positive effect on credit scores. The good news is that either party can terminate the Authorized User category on an account; again doing so could impact the credit scores.
First priority is the mortgage. To be fair it is in the best interest of both parties that the house goes to the person that can afford it on their own income. If neither can it should be sold and the proceeds split. Basic rules are debt to income ratios not exceed 43%, including the refinanced house payment. Credit Scores meet underwriting guidelines with a locked-in Interest Rate based on the individual’s credit score. And scheduled to Close after the divorce is final. The Lender will run Credit again before Closing so the discussion above about the revolving credit lines is critical to this happening.
The next priority is car loans. Any car notes should be refinanced in the name of the person keeping the car. Credit Unions tend to have favorable rates. If you are not a member of one be sure to consult with me before making that decision.
Other areas of concern that need to be addressed are Beneficiaries on Wills, Trusts, Life, Health, and other insurance. Keith Powell contributes the following:
When going through this life transition, it’s quite challenging to adjust to your new “financial reality.” Your income is cut in half, but it’s not likely that your outgoing cash expenditures will be cut in half. It may take a few months for you to adjust to your ‘new’ standard of living, but it’s important to spend within your means and adjust your cash flow out to meet your cash flow in. You’ll want to make sure that you have plenty of money saved up for your retirement since the previous ‘retirement plan’ that you had is no longer valid. If you received any liquid assets as a part of the divorce settlement, try not to dip into those assets much after the first few months.
It’s important that you meet with a financial advisor as soon as you can, in order to put a new plan in place. The sooner you can regain your sense of financial security, the sooner you’ll be on your way to discover all that your new life has to offer you.
Also, you’ll also want to schedule a meeting with an estate attorney to update your will. This should be done as soon as you separate, or know that you are getting a divorce.
Keith Powell, CFP®, CDFA™ — Mobile: 512-963-6883
Austin Divorce Planners, Certified Financial Planner® and Divorce Analyst
www.AustinDivorcePlanners.com — kpowell@AustinDivorcePlanners.com
To better understand these credit matters, and many other things to consider, order your free annual credit reports via the toll-free FACT-ACT program at 1-877-FACT-ACT (322-8228). The reports will show up in your mailbox in about two weeks. Contact us to make an appointment to do a Profile Review. This review could save you thousands of dollars over a very short period of time. For a Mortgage / Credit Score Analysis Click Here
Be good to each other, and remember the good times!