Maintaining Your Rating.
Divorce may no longer be socially unacceptable but can impact your creditworthiness. So, while filing for divorce, you must be careful if you have taken a joint loan with your spouse or acted as the "guarantor" of a loan taken by him/her.
To understand the impact of divorce on credit history, let's see how lenders and credit information bureaus, which rate people's creditworthiness, treat joint loans.
In a Bind
The main aim of applying jointly is to take a higher loan. When you apply for a joint loan, you and your spouse enter into an agreement with the lender to pay your respective dues. A default will hit the credit history of both.
If you agree to be the guarantor of a loan taken by someone, you take the responsibility of paying if the borrower defaults. This is not all. In such a case, the lender may assume the outstanding loan in your account. This means when you apply for a loan, the amount sanctioned could be arrived at after deducting the outstanding amount of the loan for which you are the guarantor.
"You are legally responsible for another person's debt if it is joint or you have agreed to be a guarantor (someone who would pay a person's debts if he/she couldn't). If a debt is in two names, both are responsible for paying it back," says Mohan Jayaraman, managing director, Experian Credit Information Company of India.
Since you are responsible for repayment in both the cases, your credit record can be hit by the action of the other person.
Marriage to Credit Bureau
When you apply for a joint loan or become a guarantor, the lender reports this to credit bureaus. Based on the lender's information, the bureaus enter the loan amount separately against the accounts of both the partners, who are responsible for repayment individually.
However, the report will clearly categorise it as a joint loan. Similarly, if you are the guarantor to a loan, your credit report will show the loan in your account but in the capacity of a guarantor.
"When lenders share information with us that you and your spouse have a joint loan, or you are the guarantor to a loan, the account is flagged accordingly in the credit information report as joint, guarantor, individual, etc, and complete account information, including account number, current balance, date of last payment, etc, appears on your credit information report," says Mohan Jayaraman of Experian Credit Information Company.
No matter in what capacity the ownership of the loan is recorded in your name, you stand the risk a negative credit rating in case of a default.
No Love Lost
If you are on the verge of divorce and have joint financial liabilities, it is better to amicably settle all joint loans, setting aside all emotional disconnect and bitterness. You can do so by either agreeing to service the loan together even after separation or converting it into individual loan, the latter being a little tougher option.
"When you took loans jointly, you and your spouse entered into an agreement to pay the dues. When you part ways, each of you remains fully liable for your debts," says Arun Thukral, managing director, Credit Information Bureau of India Limited (CIBIL).
The divorce decree, the court's formal order defining the terms and conditions of the dissolution of the marriage, may spell out who is responsible for loans taken while the two were together, but the couple still has to request the bank to change the loan agreement accordingly.
However, converting the loan from joint to individual may not be easy. This is because lenders will be reluctant to do so as loan eligibility is higher in joint loans than in individual loans. If the outstanding amount is more than what you are eligible for individually, the bank may reject the conversion request.
"If the spouse responsible for paying the loan under the divorce decree is unable or unwilling to pay and the agreement has not been changed by the lender, the late payments will appear on credit reports of both," says Thukral of CIBIL.
Any default even years after the divorce will be reported in the credit history of both people associated with the loan.
"It is a good idea to press on with sorting out your finances, even if it is complicated. Most lenders are quite used to this situation and will help you. Tell them about your new circumstances. It is in their interest to make sure that the loan servicing does not suffer and that there is clarity on who has to pay what. If you are using a solicitor, he or she will help, if necessary," says Mohan Jayaraman.
Reproduced From Money Today. Copyright March 01, 2013. LMIL. All rights reserved.
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