Take action to protect your credit during divorce

Divorce is a sad event. If it’s inevitable, then be sure to protect your credit status.

Surprise discovery of maxed-out credit cards or a spouse's refusal to pay certain bills can lead to a total breakdown in communication and the destruction of at least one spouse's credit, and maybe both.

It doesn't have to be this way. By creating a specific plan to maintain one's credit status, anyone can ensure that "starting over" doesn't have to mean rebuilding credit from scratch.

The first step is to obtain copies of your credit report. (Once a year, you may obtain a free credit report by visiting www.AnnualCreditReport.com.)

Create a chart, and list all of the accounts that are currently open, with the following information: creditor name, contact number, the account number, type of account (e.g. credit card, car loan, etc.), account status (e.g. current, past due), account balance, minimum monthly payment amount, and who is vested in the account (joint/individual/authorized signer).

Next, make the plan.

There are two types of credit accounts, and each is handled differently during a divorce. The first type is a secured account, meaning it's attached to an asset. The most common secured accounts are car loans and home mortgages. The second type is an unsecured account. These accounts are typically credit cards and charge cards, and they have no assets attached.

When it comes to a secured account, your best option may be to sell the asset. This way the loan is paid off and your name is no longer attached. Or you may be able to refinance the loan. In other words, one spouse buys out the other. This only works, however, if the purchasing spouse can qualify for a loan by themselves and can assume payments on their own.

Your last option is to keep your name on the loan. This is the most risky option because if you're not the one making the payment, your credit is truly vulnerable. If you decide to keep your name on the loan, make sure your name is also kept on the title. The worst case scenario is being stuck paying for something that you do not legally own.

In the case of a mortgage, enlisting the aid of a qualified mortgage professional is extremely important. This individual will review your existing home loan, along with the equity you've built up, and help you determine the best course of action.

When it comes to unsecured accounts, you will need to act quickly. It's important to know which spouse, if not both, is vested. If you are merely a signer on the account, have your name removed immediately. If you are the vested party and your spouse is a signer, have their name removed. Any joint accounts (both parties vested) that do not carry a balance should be closed immediately.

If there are jointly-vested accounts which carry a balance, your best option is to have them frozen. This will ensure that no future charges can be made to the accounts. When an account is frozen, however, it is frozen for both parties.

If you do not have any credit cards in your name, it is recommended you obtain one before freezing all of your jointly-vested accounts. By having a card in your own name, you now have the option of transferring any joint balances into your account, guaranteeing they'll get paid.

It is also important to know that a divorce decree does not override any agreement you have with a creditor. So, regardless of which spouse is ordered to pay by the judge, not doing so will affect the credit score of both parties. The message here is to not only eliminate all joint accounts, but to do it quickly.

Understanding the Lender/Appraiser Relationship

Borrowers are often confused by the appraisal process. Frequently they are disappointed by the value an appraiser assigns to their home, and can’t make sense of the written appraisal itself. It is important to know that appraisal guidelines are set by lenders, and that these guidelines have become stricter recently. Also, there are different types of appraisals with different rules, depending on what the use will be.

Basically, lender guidelines require appraisers to arrive at a fair market value on homes based on comparable sales in the same area, with adjustments to value based on the local marketplace. For instance, if the subject property does not have a fireplace but one of the comparison properties does, then an adjustment for that feature is made according to the appraiser’s best estimate of the value for a fireplace in that particular neighborhood. There are no national or state averages.

Upgrades to new homes can usually be included at full value, because the only way to obtain the upgrade is to pay more for it. However, it’s difficult to capture the full cost of remodeling or renovating an older home. This is because the property had value in its original condition, and the incremental value of the remodeling or addition has to be supported by comparisons within the same marketplace.

Comparisons must be taken from market activity within the last six months, and usually from closed sales. However, pending sales may be considered if there is a dearth of comparables or if the lender wants to see if there is a trend up or down. The guideline actually is for appraisers to base their opinion on the value of comparable properties which have closed escrow, and for any supporting evidence from pending sales merely to substantiate the opinion.

If property values are quickly rising, appraisers may be able to note this and put more weight on the information from pending sales and listings. Currently, lenders are more apt to insist on conservative appraisals.

In the case of very large loans or if a lender suspects an inflated appraisal, they may perform a field review. If they find that the value is too high, they will use their own appraised value, which can mean that the loan amount is reduced, or the terms of their offer worsen. Avoid problems and unhappy surprises by working with careful mortgage brokers who use reputable appraisers!