Spouse Obligated on Debt in Divorce
After a lengthy legal process Sandra and Michael just concluded their
divorce. As part of their divorce decree, the Court's order awarded Michael the
house and required Michael to pay the outstanding joint mortgage balance.
Michael felt he was paying too much to Sandra in child support. In order to
make ends meet, Michael failed to pay the mortgage on the home in a timely
manner. the creditor began calling Sandra and sending her threatening late
payment and ultimately foreclosure notices. Sandra mailed the mortgage company a
copy of her divorce decree insisting that Michael was responsible for the debt.
After all, he got the house!
Spouse's Non-Payment
Affects Your Credit
It was not until too late that Sandra discovered that mortgage companies or
creditors in general are not bound by divorce decrees regarding the payment of
debt. Sandra soon discovered that the late mortgage payments affected her credit
and appeared on her credit reports with all three credit bureaus limiting her
ability to secure loans or purchase a house of her own.
It is important to remember that divorce decrees and other court orders are
binding only on the parties to the divorce. Since the creditor has a signed
contract bearing each party's name, the creditor may pursue repayment of the
debt from either or both parties. Your ability to obtain financing depends
greatly upon your credit rating. When you apply for a loan of any type, even a
credit card, the creditor will review your credit report to determine financial
risk. You give the lenders the permission to access your credit report whenever
you sign a credit application. Unless you adequately protect your credit, you
may limit your ability to obtain credit, purchase a home, a car, appliances,
obtain credit cards or even refinance.
The best way to protect your credit rating is to make sure that the only the
party obligated to a creditor on a debt becomes the party responsible to pay it.
If you are jointly responsible for a debt, you may wish to consider ways to
remove one party's name.
Solutions
- Novation. Novation means
substitution of an new debt for an old one. In some very limited
circumstance, creditors may agree to a Novation which removes the name of
one person as an obligated party on a debt. This generally only occurs when
the party remaining on the debt has great credit and a significant income.
- Refinancing: In most divorce
cases, debts, particularly secured homestead loans and mortgages, are
refinanced by the party seeking to retain the secured asset as part of the
property settlement in exchange for a title transfer. The secured debt is
refinanced into one party's name in an amount sufficient to satisfy the old
joint debt and to provide a cash buy-out for any equity the other party may
have in the asset or in an amount necessary to equalize a much broader
property settlement. Generally, this is the ideal way to satisfy debt and
credit issues as part of a divorce.
- Sell The Asset (House):
In the event that neither party to retain the asset on which a loan is
secured, the asset may be sold, the joint debt extinguished and the equity
divided. Obviously, this is not always the ideal solution. Often the parties
own a home that has a sufficiently reduced mortgage payment which makes that
acquisition of a similar property with the same affordable monthly payment
unlikely. This is particularly true when children are involved in the
divorce. Additionally, as with any sale, the asset or, in the case of a
house, the property must be made saleable through improvements and repairs.
Such repairs may often be cost prohibitive.
What is a Court Likely to Do?
What a Court is likely to do depends greatly on the facts of each case.
However, in most cases, the Court will attempt to award each party one half the
value of all assets.
Staying in the
Home until the Children are 18. It is less likely these days that a
Court will allow a custodial parent to remain in a home with equity until the
children reach the age of 18 before requiring the home sold and/or the marital
equity divided. However, this may occur in very limited circumstances where the
home provides a level of stability that the children would not enjoy elsewhere,
the current home is affordable, and it is not likely that the custodial parent
will be able to afford a different suitable home for the children.
Protective Language. In the event
that the parties are unable to effectively separate their debts so that each
party is obligated only on their own debt, all is not lost. Protective language
relating to joint debts may be included in the divorce decree which:
- Ties the debt or mortgage payment in as part of the financial
support; and
- Limits the obligated party's ability to bankrupt out of the debt; or
- Requires any assets securing the debt (such as a home) to be placed
on the market for sale in the event that the party ordered to pay the
secured debt fails to make payments.
How Do I Refinance?
A large part of refinancing a debt or even qualifying for a new loan involves
preparation.
Obtain a copy of your credit report. Before approving a credit application
lenders review a copy of your credit report form one or more of the three major
credit reporting agencies. You should know what these lenders will be looking at
when they review your application.
Note Credit Problems. When reviewing your credit report you should look for
common credit problems such as delinquent payments, defaulted loans, unnecessary
debt and unnecessary credit. Be prepared to close out unused credit card
accounts, pay off smaller debts and explain late payments or credit
discrepancies.
Pre-qualify. You may ask a creditor to review your application and
pre-qualify you for a mortgage or other loan. By pre-qualifying you will know
how much money you will receive, how much home you can buy or how much equity
you can pay to your spouse if you are cashing them out.
How Do I re-establish
Credit?
To re-establish or improve your credit rating after a divorce, it is
important to remember that even the longest journey starts with one step. Obtain
a credit card. Avoid those credit cards that charge exorbitant fees or secure
the debt on purchased assets. Secured credit cards typically have higher
interest rates than unsecured card and annual fees also are common. Often small
visa card companies are a good place to start. Even if your credit is poor, you
may be able to obtain a credit card with a small credit limit.
When you obtain the credit card, use it and, most importantly, pay your bills
on time. This information will be reported to the credit bureaus demonstrating
that you are a good financial risk.
After several months, apply for another card. Continue using credit cards and
paying the associated bills on time. Before you know it, you will have
re-established your credit.
