Divorce and Real Estate: The Banker is NOT the Judge

Michelle Y. Graves

“The Money Lady

The leading cause of divorce is money issues.  Despite a decline in divorce filings in today’s economic environment (legal fees, court costs and the cost of establishing a second household on the same income can be daunting), couples are still divorcing in record numbers.  Knowing the rules pertaining to joint obligations---especially real estate is critical.  Seek guidance from a domestic relations attorney before you find yourself in a deeper money hole.  

True Story:  After an especially acrimonious and lengthy process, Michael and Barbara concluded their divorce.  Under the terms of the divorce decree, Barbara was to keep the house and Michael was to make monthly mortgage payments along with child support for their two children.  Barbara relinquished her interest in his retirement plan entirely in exchange for complete ownership of the home and half of their joint savings account.  Michael quit claimed his title interest to her.  Everyone was happy…until. 

Michael lost his job and stopped making mortgage payments on the home.  He continued making child support payments (which was a good thing). The bank began calling Barbara and sending her threatening late payment notices.  Barbara mailed the mortgage company a copy of her divorce decree insisting that Michael was responsible for the debt.  The bank informed her that the terms of the mortgage contract made both of them liable---since both had signed as borrowers.  She discovered too late that under contract law, these terms were enforceable and creditors were not bound by divorce decrees.  Barbara screamed “Unfair”! 

Barbara did not know 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.   Ultimately, her properly went into foreclosure due to Michael’s non-payment.  Barbara’s credit was ruined through no fault of her own, and her future ability to purchase another home, a car, appliances or even securing employment was severely hampered.   

While protective language pertaining to joint real estate debt can usually be written into the divorce decree, it bears little weight with creditors (This same rule applies to co-signatures as well, so NEVER co-sign on credit unless you are prepared to pay for the debt entirely.) 

The best way to protect your credit rating (and minimize divorce-related stress), is to make sure that 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 your name or his from the debt obligation.  Here are three solutions worth considering BEFORE filing for a divorce: 

1. Can we sell the house?  In the event that neither party wants to keep the house, it can be sold, the joint debt paid off, and any remaining equity split.  In today’s market, depending upon length of ownership, there may not be sufficient equity to make a sale possible or even financially feasible.  If children are involved, the stress of moving and establishing a new life may make such an option difficult.
2. Novation?  Novation is a legal term that simply means substitution of a new debt for an old one.  In some circumstances, creditors may agree to remove the name of one borrower from the debt through contract modification.  This rarely occurs since the creditor is increasing it’s exposure to the debt by removing a borrower. 
3. Can we refinance?  This is the primary vehicle for removing one person from the mortgage and the deed itself.  The mortgage is refinanced into one party’s name in an amount sufficient to satisfy the old joint debt and, in some instances, provide enough cash to buy-out any debt or credit issues as part of the divorce.  For example, using the above illustration, Michael and Barbara have a home appraised at $200,000 and a mortgage balance of $125,000. There is $75,000 in equity of which Michael’s portion ($37,500) is part of Barbara’s settlement. The divorce decree requires Barbara to refinance within a specific time period.  If Barbara is credit and income qualified, she will secure a new mortgage in her name only for $125,000.  If this is a real possibility, insist that the proper language be written into the divorce decree, along with a specific timeline for execution of this requirement. 

Michelle Y. Graves, “The Money Lady” has been involved in the fields of banking and investments for over thirty years.  She was the first African-American woman inducted into the Ohio Women’s Hall of Fame for her achievements in banking and has been a frequent contributor over the years to the Cincinnati Herald on money matters.  She can be reached at www.michellegravesonline.com.