Preventing Credit Damage in Divorce Cases Preventing Credit Damage in Divorce Cases
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Top Tips in Ten Minutes
Preventing Credit Damage in Divorce Cases [1]
Ian B. Lyngklip, Lyngklip & Associates Consumer Law Center PLC

While it is impossible to guarantee that the conduct of a former spouse will not harm your client’s credit, the following steps can reduce the risk of credit harm and help you manage client expectations.

Tip 1:  Keep a credit record for marital accounts
Suggest your client keep a separate file containing dispute letters, credit reports, denials, and billing histories relating to marital accounts. Because debts often reappear after many years, these records will provide proof of the client’s credit history and reputation if needed at a later date. Neither credit bureaus nor creditors maintain copies of monthly credit reporting. Additionally, most creditors and consumer reporting agencies destroy dispute correspondence after five years.
Tip 2:  Obtain credit reports for each spouse before severing the marital estate
Before dividing the estate, make sure you have an accurate picture of the financial relationship of the parties. The best source is the credit report of each spouse. A review of the credit reports will identify accounts held jointly and individually, and it may unearth previously unknown debts that must be divided. You cannot obtain your client’s credit report without a written authorization or a court order. Ask your client to either order the report or complete an authorization allowing you to order it directly. This is equally applicable for the opposing party. The best approach is to obtain a stipulation for issuance of a subpoena signed by the judge or agree to exchange these reports.
Tip 3:  Close all joint credit accounts to new charges
Contact creditors on open accounts and make sure the parties close these accounts to new charges. Unless the parties receive a written confirmation of closure from the creditor, the client remains exposed to potential liability for new charges.
Tip 4:  Discharge joint debt using existing or new individual debt
Because joint debt poses such a great risk of credit damage to spouses after divorce, a smart strategy is to discharge all joint debt. Creditors rarely release a single party from liability for outstanding joint debt. Best practice dictates that the parties pay off any outstanding joint debt. Parties who do not have the funds to discharge outstanding debt outright should refinance that outstanding debt. This may be accomplished using a combination of existing assets, existing lines of credit, and new credit in only one spouse’s name. To the extent possible, the legal liability for debt should mirror the individual responsibility for marital debt. Any strategy the parties can use to accomplish this will reduce opportunities for unforeseeable credit damage.
Tip 5:  Advise clients to monitor open accounts
Virtually all major creditors now allow consumers to electronically monitor their accounts via the Internet and receive automated notifications when payments are late. Similarly, many credit card companies and credit reporting agencies offer monitoring services, allowing clients to receive advance warning of potential harm to their credit before it becomes significant or irreparable. Because industry standards require reporting of delinquencies after 30 days in arrears, a client who continues to monitor open accounts for late payments can avert serious credit damage before it occurs by paying bills on time and seeking reimbursement from his or her former spouse. Once an account goes into delinquent status, the exclusive remedies of the Fair Credit Reporting Act provide no mechanism for repairing damage to a credit report that accurately sets forth the client’s credit history.
Tip 6:  Negotiate protection in the divorce settlement
The judgment should include contractual protections for your client regarding remaining joint debt, including indemnity for credit damage arising from joint obligations, a prohibition on incurring any new debt in the other spouse’s name, and fee shifting for enforcement of these provisions.
Tip 7:  Notify credit reporting agencies
Notify the credit reporting agencies to remove your client from any prescreened lists and inform them of any change in the status of the marriage, joint accounts, and addresses. This notice will
  • reduce the possibility that a new credit account may be opened jointly or in the name of a spouse who has not consented,
  • provide an important predicate to liability against the major credit reporting agencies in the event of identity theft by the spouse,
  • prevent misdelivery and misuse of any preapproval offers arriving at the home of the former spouse, and
  • reduce the opportunity for identity theft by a former spouse.
The credit reporting agencies can be reached at Experian’s website, Equifax’s website, and TransUnion’s website.
Tip 8:  Give your clients clear advice about what to expect
Most clients believe that, with the conclusion of their divorce, all matters will be settled. To the same extent that parenting, alimony, and support issues can persist after the final judgment, so too can credit issues. You should give clients a clear idea of what to expect in relation to credit reporting and their continued legal obligations regarding debts that survive the marriage. A smart strategy is to provide the client with a summary of all marital debts, along with the client’s responsibility for each of the debts, and a description of how the debts should appear on the client’s credit reports, how to monitor surviving debts, and what to do in the event of a problem.
Tip 9:  Follow up
In the vast majority of cases, the credit bureaus, banks, and debt collectors will not correctly document the status of the debt after the final decree. By following up and simply reminding clients to review their credit reports, you provide a great service and gain an opportunity to assess continuing legal needs and potentially find new cases.
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1 Adapted, with permission, from the March 2014 issue of the Michigan Bar Journal.