finances after a divorce?When the wedding bells ring, nobody wants to think that their future plans might go sour, but unfortunately divorce is something that could happen. While the divorce rate has been falling for decades, the truth is that there are still a lot of couples who, expecting only to part in death, are unprepared for the financial fallout of their divorce. To add some perspective to this topic, we’re shedding some light on some of the ways divorce will affect your finances and credit.

What are the general financial effects of divorce?

While divorce is a stressful and emotional occurrence, the good news is that divorce doesn’t directly harm your credit. As we’ve stated before, your marriage isn’t specifically dictated by your spouse’s credit reports. So even if you’re married, your credit history is distinct from your partner’s. Still, things will get complicated if you share loans, credit accounts or assets. Because marriage creates the perfect scenario for situations in which both spouses share assets, debts and other financial relationships, causing things to become increasingly complex over time, there are usually a number of instances when both people are responsible for particular credit-related obligations.

What types of financial arrangements will be affected by divorce?

Divorce can come with a lot of financial twists and turns, especially when it’s unexpected or after a long relationship. However, there are a handful of key areas that are of significant importance to divorcing couples:

1. Joint accounts and shared debt. Financial arrangements involving shared debt, like joint credit cards, mortgages and loans in both spouses’ names, often contain agreements that place equal responsibility of payment on both spouses. This means that even in the instance of divorce, failure to make consistent payments will hurt both spouses’ credit. Nothing, not even a court order assigning payment to a single spouse, can change that. As such, it’s in your best interest for you and your spouse to have a plan to pay off shared debt that you will both stick to even after a divorce.

2. Joint tax applications. Filing your taxes jointly translates to having a joint tax obligation when it comes time to pay Uncle Sam his dues, even if you’re divorced. There are very few cases in which the IRS excuses this shared obligation; however, in many cases, should one spouse fail to pay, the other one becomes fully responsible for the entirety of the remaining tax bill. If you’re unsure as to how divorce will impact your taxes, we suggest you, reach out to a specialist through your preferred online tax service, ask a trusted tax accountant or use some of the free tools on the IRS website.

3. Prenuptial agreements. The prenuptial agreement, or prenup as it’s known colloquially, is a premarriage agreement that specifies how to allocate assets and debts in the instance a divorce occurs. Prenups have traditionally been seen as something only rich or famous people do, but they are becoming increasingly common for everyday people too. While it might seem weird to plan for divorce before marriage, prenups are often seen as a good idea because they provide a way of enforcing boundaries on what is fair game with regards to settlements with your spouse or creditors in terms of debt that you and your spouse accumulate after marriage. A prenup can, within legal reason, determine what debts each party is responsible for paying. The laws determining what type of debt may be excluded on a prenup depends on the state you live in and the type of agreements you have with creditors.

4. Post-divorce obligations. If you have child support or alimony payments after divorce, failure to pay these in a timely fashion could result in derogatory marks on your credit reports. Unfortunately the reverse isn’t true; neither timely alimony, nor child support payments are reported to credit bureaus, meaning that these items can’t have a positive credit building effect on your credit scores.

Divorce may be a situation where many people don’t expect to find themselves, but knowing what impacts divorce has on your finances and credit can help you prepare for this less-than-ideal situation. For more information about maintaining your credit, regardless of your circumstances, keep reading our credit monitoring blog.