There are a number of financial risks individuals and couples face during their divorce process. These can include a partner abusing the trust of their spouse by taking out credit in the other person's name, draining bank accounts, and hiding valuable objects.
By sharing assets and debts, whether married or going through a divorce, a couple needs trust as they have financial risk being attached to another person. For instance, whether a couple is married or getting a divorce, one person’s debts and spending habits directly impact the other person. One spouse can be held liable for the debts of the other, simply for being married when the debt was accrued. During a divorce, we see the largest financial “risks” as:
One spouse draining the bank accounts, retirement accounts, etc.
Spouse accruing new debts or liabilities without their spouse's knowledge;
Spouse hiding valuable assets;
One spouse taking debt in the other spouse's name;
One spouse removing the other spouse from health insurance or other insurance coverage;
One spouse removing the other spouse as beneficiaries on accounts; and
Spouse “cutting off” other spouse by removing their access to credit cards, bank accounts, and other funds.
Although there are a number of risks, there are legal protections that can be put into place with certain legal filings during their process. For instance, in Arizona, during the initial filing for divorce (Petition) a document referred to as a Preliminary Injunction is put into place to set financial guidelines with the spouses, such as not taking on new debts or being able to sell assets without the other spouse’s permission.
Why should couples freeze their credit scores during divorce?
While a credit freeze can be helpful in preventing on spouse from opening new debts in your name, this can also prevent you from moving forward with other important decisions in your divorce. A credit freeze prevents a creditor from accessing your credit report. One specific instance where this can be detrimental is with qualifying for a home. Many individuals want to retain their home during their divorce or want to purchase a new home. In order to make knowledgeable decisions regarding the house (can one person afford it on their own or can one person qualify for the loan mortgage on their own), access to a credit score is helpful.
If you co-sign credit card agreements with your spouse, how can you cancel these agreements if your spouse is not willing to do so?
It is extremely rare for a credit card agreement to be based on both spouse’s credit. Instead, credit cards are typically in one person’s name based on their credit and the other spouse is added as an authorized user. Removing an authorized user and ultimately the effect the credit card has on their credit score is very easy – it’s typically just a simple phone call. If debts are joint, the couple's divorce agreement can be reached (and made a legally binding order of the court) that the debt is divided in some way or transferred to individual lines of credit.
What are some other financial protections spouses should employ during a divorce?
Often, couples will begin to separate financially without guidance of a professional or even beginning the filing of the divorce paperwork. This can be extremely detrimental because 1) the division your assets and debts during divorce has unique implications that a professional should guide you through and 2) without legal filings in place, you are still married and lack the protections provided by a legal divorce process.
Some other items to consider are:
Credit monitoring;
Limiting any new, large purchases; and
Working with a professional to help create temporary agreements/orders that structure how your finances will work during the divorce process until you have final agreements (division of expenses, living in the home, support payments such as child support and alimony, etc).
How can couples protect funds in joint bank accounts?
Many couples I work with will mutually agree to divide their joint account at the beginning of their divorce. In this way, the joint account is closed, and they each have money of their own. If they choose to make any new purchases, it will come out of their half of the funds. Another option is monitoring your joint bank account, i.e. checking it weekly, setting up alerts, etc.
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