Divorce Has Both Short and Long-Term Financial Consequences

Divorces wreak havoc. Families are split, houses are sold, debts mount and children can be caught in the middle. Most people realize the practical effects of a divorce (i.e., that one party will move from the marital home and have a new residence, marital property will be split), but aren't necessarily aware of the financial consequences.

Why Does Divorce Matter Financially?

Divorces don't just affect a couple's finances by splitting one household into two, though that impact will be felt early on in the process. The process involved in establishing another residence is tedious and costly. There are now twice as many rent or mortgage payments to consider as well as double the utility costs. For most people, particularly in our still-struggling economy, the short-term financial hardship of divorce is a huge added expense.

Unfortunately, though, the financial effects of divorce go far beyond short-term household cost increases. Many people don't realize that one of the "side effects" of a divorce is a lowered credit score, which can affect everything from your ability to buy a new home in the future and even prevent you from financing your child's (or your own) higher education.

Credit ratings can take a hit in a divorce because lenders are now considering the parties as individuals instead of as part of a family unit when contemplating new credit awards. Essentially, if the parties had joint bank, credit card and mortgage accounts in the past, lenders now hold each individual consumer liable for the entirety of those accounts. Most people don't think of this as a possibility because they assume their former spouse will make the payments; after all, the court did order the debt to be paid. Having the same amount of debt with a smaller income ratio will result in a lower credit score if any of the accounts should need to be refinanced or transferred.

For example, let's assume that Bob and Meg have a joint credit card. As part of the divorce decree, the judge orders Bob to pay the balance on that card. Bob loses his job and is unable to make the payments, so his credit rating will take a hit. In addition, though, the lender will still hold Meg responsible for the payment of the bill, meaning she can face collection actions or litigation and can expect a noticeable drop in her own credit score if payments are made late. If, however, Meg had her name removed from the account prior to it becoming past due or in need of collection, she is no longer on the hook.

No matter how you look at it, a divorce has the potential to wreck a person's finances for years to come. Taking steps early on in the process - including working with a skilled family law and divorce attorney from the start - can go a long way toward limiting the reach of financial ramifications.