Don't Let Divorce Poison Your Finances and Credit

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Money trouble often follows divorce. As Candace Bahr, cofounder of the nonprofit Women's Institute for Financial Education, puts it, "No matter how much money you get, you have half the income and half the assets you had previously," because the income is now spread over two households instead of one. Not surprisingly, divorce is one of the most common causes of bankruptcy. Here are strategies for keeping your finances solvent long after your marriage isn't.

Get your credit report. Examining your credit report for inaccuracies is especially important after a major life event, such as divorce, particularly if you will soon be taking out new home or car loans. Errors on the report can lower your credit score and keep you from getting prime interest rates.

Separate your credit from that of your former spouse. If you are still registered as a co-owner of the credit card that your ex-spouse uses, then you will continue to be liable for any charges on it. Post-divorce credit problems, which are common, usually can be avoided by closing joint accounts. "The safe thing to do is to cancel all the cards and make both spouses get cards in their own names," says Evan Hendricks, author of Credit Scores & Credit Reports.

Examine your debt. Debt—especially debt from multiple sources—can quickly become overwhelming after divorce lowers monthly income. Estimate your post-divorce income, and calculate what you can afford to pay. If current obligations exceed that amount, cut back on spending. If it's too late and you find yourself in a deep credit hole, options include debt settlement and filing for bankruptcy, both of which will stay on your credit report for seven to 10 years and temporarily lower your score.

If you must file for bankruptcy, start rebuilding your credit soon. Neil Colmenares, a New York bankruptcy attorney, recommends taking out two credit cards and paying them off in full each month. Barring any other debts, he says that after one year, your credit score "should be pretty good." One banking industry secret, he adds, is that some creditors prefer to lend to recent bankruptcy filers, because they are barred from filing again for eight years and are liable for new debts.

Think positively. Most people's credit eventually improves after filing for bankruptcy, because debts are cleared to give them a clean slate. Says Mark Scarberry, a Pepperdine University law professor and scholar-in-residence at the American Bankruptcy Institute, "Recognize that the fresh start is a gift. Take advantage of it." Some might say the same about their divorce.