When the Love Boat morphs into the Titanic and you are flailing in the icy waters of the North Atlantic, the banks are not rescuers, they're sharks. In other words, divorces can get messy -- sometimes really messy -- and it should come as no surprise that money is often at the root of the problem. Getting through the divorce is hard enough, but the money problems don't always end when the papers are signed. In fact, joint credit card and other types of debt can very easily outlive a marriage.
We've heard plenty of stories wherein an ex has damaged the former spouse's credit because of unpaid credit card and other debts. Here we look at one such cautionary tale:
As part of a divorce settlement, a friend of mine forfeited his equity in a home he had jointly owned with his ex, but couldn't wriggle out from under the $100,000 that remained on their home equity line. You see, creditors, like a spouse's divorce lawyer, are pretty old fashioned when it comes to the "till death do us part" thing.
So every month, my friend dutifully mailed his half of the minimum payment to her. She then made her payment through an automatic debit program at her bank -- or at least she thought she had. But she hadn't. She missed a few. Her credit score took a nose dive. His fell in lock-step with hers.
What does a hysterical ex-spouse do? As Monty Python would say, "Run away?" Well, basically, you have two choices: convince an unsympathetic lender to remove your name from the loan (achieving universal peace has a higher probability of success), or pay it off.
Casting for a Solution
He begged her to refinance. She was as unenthusiastic about that as the bank was about letting him off the hook. She needed reassurance that he would still stand up for his half. He agreed. They negotiated terms that protected her from nonpayment on his part, and she promised to refinance.
Unfortunately, a borrower's willingness to refinance does not guarantee a bank's willingness to approve a mortgage. As her credit score was a shade under 650, affordable refinancing was both unrealistic and unattainable. That "till death do us part after we part" thing raised its ugly head. So, every month he held his breath at payment posting time.
Finally, when he could stand the stress no longer, he sought counsel from a friend and opened himself up to the concept of pro-actively managing both his and his former spouse's credit. He looked at what actually makes up a credit score.
The 30% Solution
He learned that 35% of a credit score is based upon payment history. Other than making his payments in a timely fashion and reminding his spouse that it was in her best interest to make hers on time as well (a fact of which she was well aware), there was little he could do to directly control the outcome.
Then he focused on the next 30%: debt utilization. There was his opportunity.
He was running balances on a number of credit cards that put him almost at his credit limits. He thought carrying large balances, while making reasonable payments on time, would enhance his credit score because he was demonstrating that he could manage debt responsibly. Making on-time payments is in fact good for a credit score, but the closer you get to your credit card spending limits, the worse it is for your score.
When he recognized his mistake, he created the ultimate debt liquidation plan. In one payment he brought his credit card balances down to zero and his utilization ratio well below the 10% threshold. His credit score rose significantly.
Next, he was advised to send a note to the credit reporting agencies explaining that as a result of an automatic debit misunderstanding between his ex and a bank, a series of payments (over which he had no control) were reported as late to the credit bureaus. He went on to say that sufficient cash had been available (and remained) in the account to cover the ghost transfers.
Three months later his credit score was 776.
Helping Out to Move On
Unfortunately, his credit score was not transferable to his ex. She needed to refinance, but her credit was still lingering in the mid-650 doldrums. Her issue -- beyond the late payments -- was a $7,500 debt balance spread over a few credit cards, which she was forced to carry due to her inability to pay them off. That played a major role in pushing down her credit score.
My friend decided to pay off his ex-wife's credit card bills using the "just in case" money he had set aside against the credit line. Her credit score began to rise. Then, she also sent in a note to the reporting agencies explaining the origins of the late payments. Time will tell if it's as effective for her as it was for him.
So is there a happy ending? We don't know quite yet. But here's what we do know. He paid part of what he was obligated to pay under the divorce agreement a bit sooner than he expected but:
- They both reduced their credit card debt.
- Both of their credit scores increased.
- She is more likely to get approved by the bank to refinance the house.
- He is close to getting off the hook.
- He is now the master of his credit score.
- They are still friends.
Well, even if you don't have the money to do it all at once, this is arguably a smart strategy. When you end a marriage and still retain joint liabilities under a mortgage, equity line or credit card, though you're apart, you can (and will) be intertwined in a financial relationship for a very long time. Helping an ex pay off debt faster may be the quickest way to sever that relationship once and for all, and enable one, if not both, of you to begin a new, healthier phase of your life.
Adam Levin is chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.