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Mortgage Issues - Refinancing in Divorce
(provided by Maury D. Beaulier, Esq.)

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.


  • 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:
    1. Ties the debt or mortgage payment in as part of the financial support; and
    2. Limits the obligated party's ability to bankrupt out of the debt; or
    3. 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.

    Information provided by:
    Maury D. Beaulier, Esq.

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