How might my credit be affected by my divorce?
If you have tried a “do it yourself” divorce agreement, you likely found yourself on a mine field of legal and financial issues. Should you step on one of those mines, the financial damage could be serious. Here are issues you need to consider, with the help of one of our experienced divorce attorneys, regarding assets and debts when agreeing to a settlement in your divorce.
First, consider the nature of assets. If an asset is “liquid,” that means it is easy to get its cash value, such as a bank account. Real estate is “illiquid” because it can be difficult to convert its cash value. If, on balance, the assets that each spouse will get are about the same, it may appear to be an equitable decision. But if one side’s assets are largely illiquid, cash may be needed to maintain them (like paying for insurance and taxes) but in short supply. Converting these assets to cash will involve cost and time so what looked like a fair deal actually is not.
Second, consider taxes. Different assets are taxed differently so the value may appear to be good, but the cost in taxes may be bad. The effect of your settlement on various taxes can be very costly if not addressed properly. Capital gains, income tax and alimony are some areas impacted by taxes.
If a big part of the settlement involves retirement assets, there are many tax issues and possible penalties. Under normal circumstances, distributions from a retirement plan before age 59 1/2 are considered “early distributions” and subject to a 10 percent penalty tax and the ordinary income tax. A transfer to an ex-spouse as part of a divorce settlement is an exception. Income taxes still apply, so any assets from a “qualified plan,” like a 401(k), will be subject to a mandatory 20 percent tax withholding. To avoid this, the transfer needs to be made directly to another retirement account, such as an IRA.
Third, consider debt and credit scores. Don’t start off your new life with a bad credit score. Get a copy of your credit report. It should show all joint accounts, accounts you may be unaware of and potential credit problems. Pay off and close all joint accounts prior to the divorce settlement. Open new accounts in your own name.
Though a separation agreement may divide responsibility for joint debt, it has no effect on the creditor. Each person is liable for the full amount of debt until the balance is paid, whether married or not.
The experienced family law attorneys at Nirenstein Garnice PLLC serve clients in the Scottsdale, Arizona, area. We can help you reach a fair and equitable divorce settlement. Call us today at (480) 351-4804 or email us for a free consultation.