Protecting Credit During Divorce
Many clients express concern, with good reason, about their credit ratings during and after divorce proceedings. One experienced divorce lawyer recently told me, “I can’t protect their credit. Protecting their assets is hard enough.” Yet, in some cases, a good credit rating is an important asset, as it provides the ability to borrow at reasonable rates to purchase a new home, finance the purchase of business inventory or equipment, or meet short-term budget gaps. Judges are generally oblivious to credit ratings during divorce and child support proceedings. There are no provisions in the law to protect credit ratings, so settlement may be critical to the preservation of good credit. There aren’t any perfect answers for protecting a credit rating during divorce, but these tips can help:
1. Pay child support on time, or even ahead. In Pennsylvania, the State Collection and Disbursement Unit (PA-SCDU) reports delinquencies to the credit bureaus whenever child support is not paid on time. Paying on time can be tricky. Child support orders are charged in full on the first day of each month, unlike utilities and credit cards, which send you a bill at the end of a billing cycle. Payments are considered to be “on time” as long as the full monthly amount is received in Harrisburg by the last day of the month. Wage attachments are required by federal law unless waived by the support recipient. Even when the wage attachment is waived, all payments must be made through PA-SCDU in Harrisburg; private payments are not counted. Payroll deductions are matched to the frequency of the obligor’s pay period. In other words, an obligor who is paid on the 15th and 30th of each month will see 1/2 of the child support deducted from his or her paycheck. This creates problems for obligors who receive their paychecks every two weeks. In most months, those obligors will receive 2 checks per month, but twice a year they get 3 paychecks in the same month (26 pay periods per year). The wage attachment will be less than 1/2 of the monthly support, so obligors who are paid bi-weekly can fall behind if they do not send in supplemental payments in the months when they receive two checks.
2. Consider taking your support payment “off-line.” Settling a support or divorce case can help to preserve a credit rating by taking the support payments outside of the PA-SCDU system. This allows the obligor to send payments directly to the support recipient without credit bureau reporting. However, this requires good record keeping by both parties, to ensure there is no dispute over late or missed payments.
3. Freeze joint credit cards upon separation. When spouses get separated, they sometimes play a game of financial “chicken” with their joint credit cards, daring each other to run up the bill. While a divorce court may allocate the debt in equitable distribution, the credit card company does not have to honor the court’s allocation. The credit card company can pursue collection from either spouse, even if the court has ordered one spouse to pay the bill. Worse, the credit card company can impair credit ratings for both spouses if the payments are not made on time. To avoid this problem, the joint credit cards can be frozen or closed, even if one spouse has to transfer the balance to a separate card. Credit cards with “authorized users” often present the same problems as joint cards.
4. Get your spouse to refinance the mortgage loan. When spouses go to court to divide their property in divorce, one spouse usually wants to keep the marital residence. Yet, the residence can be a liability as well as an asset; and whoever keeps it must have the ability to pay, especially if the mortgage loan is in joint names. The court will often award the house to one spouse but leave the mortgage loan in joint names. If the spouse who keeps the house cannot afford the mortgage payment, then the other spouse’s credit rating will be ruined. Settlement is the best way to avoid this result, but when settlement is not possible, you might want to push for the house to be sold.