Real Estate & Divorce Blog: How Divorce Affects Your Credit and the Sale of a Home

Divorce is a life-altering event that brings with it many changes—emotional, financial, and logistical. One of the most significant areas affected by divorce is your credit, and if you own a home together, the sale of that property. Divorce can be financially complex, and understanding how it impacts your credit score and the process of selling a home can help you navigate this challenging transition more smoothly.

In this blog, we’ll break down how divorce affects your credit, the factors that come into play during the sale of a marital home, and steps you can take to protect your financial future.

How Divorce Affects Your Credit

When a marriage ends, each spouse's financial situation changes. Divorce itself doesn’t directly affect your credit score, but it can have an indirect impact on your credit and finances, especially if you and your spouse shared financial obligations such as joint credit cards, loans, or a mortgage.

Here’s a closer look at how divorce might impact your credit:

1. Shared Debts and Joint Accounts

One of the most significant credit-related issues during divorce is how shared debts and joint accounts are handled. If you have credit cards, personal loans, or other joint accounts, both spouses are typically equally responsible for the repayment, regardless of who is awarded the debt in the divorce settlement. This means:

• Missed payments on joint accounts can negatively affect both parties' credit scores.
• Even if your ex-spouse is responsible for paying the debt in the settlement, you may still be held liable if your name is on the account.

To protect your credit, it’s crucial to:

• Close joint accounts as soon as possible, and if necessary, open individual accounts.
• Make sure debts are paid off or refinanced as part of the divorce settlement.
• Monitor your credit regularly to ensure payments are being made on shared accounts.

2. Refinancing or Removing Your Name from the Mortgage

If you and your ex-spouse own a home together, you may need to refinance the mortgage or transfer the loan into one party’s name. This is an important step because if the mortgage remains in both names, both spouses are still liable for the payments, even if one party moves out.

• If your name is still on the mortgage, it will continue to impact your credit score and could affect your ability to secure loans in the future.
• Refinancing the mortgage or selling the home and paying off the loan will help remove you from liability, which in turn protects your credit score.

Refinancing can be tricky, especially if the household income has changed due to divorce. The spouse staying in the home must be able to qualify for the mortgage independently, which might require paying down some debt or improving their credit score beforehand.

3. The Impact of Court Orders on Your Credit

Court-ordered financial obligations, like alimony or child support, generally do not directly impact your credit score. However, failure to pay these obligations on time can affect your credit if they are reported to credit bureaus or linked to your financial accounts.

To avoid credit damage, make sure that alimony or child support payments are handled in accordance with the court’s decision, and keep track of any financial changes that could affect your credit.

How Divorce Affects the Sale of a Home

The sale of a home during or after a divorce is often one of the most challenging aspects of the process. Both spouses need to agree on how the property will be handled, and it requires coordination to make sure the sale goes smoothly.

1. Deciding Whether to Sell or Keep the Home

In many cases, couples decide to sell the home as part of the divorce settlement. However, the decision isn’t always straightforward, and it can depend on:

• Emotional attachment to the home, especially if children are involved.
• Financial considerations, such as one spouse being unable to afford the home independently or needing to release equity to divide assets.

If both spouses are in agreement to sell, the process can move forward with the typical steps of listing, staging, and selling the home. But if one spouse wants to keep the home and the other does not, this can lead to disagreements that can delay the sale or settlement.

2. Equity in the Home

The equity in your home—what you owe on the mortgage versus its current market value—plays a major role in the division of assets. If the house is sold, the proceeds are typically divided between both parties, after paying off the mortgage, any liens, and real estate selling costs.

Keep in mind:

• Market value and the housing market can fluctuate, which may impact how much equity is available to divide. If the housing market is down, selling the home might result in a loss.
• If one spouse wants to keep the house, they may have to buy out the other spouse’s share of the equity, either by refinancing the mortgage or offering other assets in return.

3. Timing the Sale of the Home

Timing can be crucial when selling a home during a divorce. You’ll want to consider:

• The housing market: Is it a seller’s market, or are home prices lower than expected? Selling in a down market can reduce the financial benefit for both parties.
• Personal timelines: One spouse may want to move quickly, while the other may need more time to find a new place to live.

Both spouses will need to come to an agreement on these timelines to avoid further tension or financial strain. In some cases, the sale of the home may take longer than anticipated, especially if it’s difficult to reach an agreement about price, repairs, or other terms.

4. Tax Implications of Selling a Marital Home

Selling a home as part of a divorce can have tax implications, particularly when it comes to capital gains taxes. Typically, couples can exclude up to $500,000 in capital gains from the sale of their primary home if they meet certain conditions.

However, if the home is sold as part of a divorce settlement, the exclusion may not apply in some cases. It’s important to consult with a tax professional to understand the potential tax liability from the sale of the home and how to navigate it.

Steps You Can Take to Protect Your Credit and Navigate the Sale of the Home

• Monitor your credit: Check your credit report regularly to ensure there are no errors or negative marks from joint accounts or missed payments.
• Communicate with your ex-spouse: Stay in contact to make sure shared debts are being handled and bills are paid on time.
• Consult with professionals: A divorce lawyer, financial advisor, and real estate agent can help guide you through the process of dividing assets and selling your home.
• Refinance the mortgage: If one spouse is keeping the home, refinancing can help remove the other party from liability and protect both parties' credit.
• Make sure the home is sold fairly: Work with a realtor who understands the complexities of divorce and can help with a fair and efficient sale of the property.

Final Thoughts

Divorce can be a stressful and overwhelming process, but understanding how it impacts your credit and the sale of a home can help you plan ahead. By taking the necessary steps to protect your financial future and navigating the sale of the home carefully, you can move forward with confidence.

If you're in the midst of a divorce and need assistance with your real estate or financial situation, feel free to reach out. We’re here to help you navigate this important transition.