Divorce is painful, complicated and often messy. And when it comes to a mortgage loan? This makes life even more complicated for separating spouses.
Ideally, spouses agree to either sell their home or refinance their mortgage so that only one person is on it. This ex-spouse is then responsible for making the mortgage payments each month.
Unfortunately, this idea is not always feasible. Often a spouse will stay at home. The divorce agreement will then specify who is responsible for paying the mortgage.
This can lead to serious problems: what if the spouse who lives away from home is supposed to pay the mortgage but stops? This will cause the other spouse’s credit to drop. That spouse’s name remains on the mortgage, so missed payments will lower that homeowner’s credit rating just as badly as the spouse who was supposed to pay.
“A jointly acquired home loan has the unfortunate potential of becoming a disaster for your credit in a divorce,” said Michelle Black, president of Hope4USA, a credit counseling service in Charlotte, North Carolina. “Your mortgage lender won’t care about your divorce judgment. Your divorce judgment will in no way release you from liability for a jointly acquired mortgage.”
The sad truth? When it comes to divorce and mortgages, there are protective steps you can take to protect your credit. But you can never guarantee that your ex-spouse’s mistakes won’t lower your credit score as well.
The best options
Andrew Vaughn, owner of Chicago law firm NuVorce and professor of advanced domestic relations law at Loyola University Chicago School of Law, said the best solution for divorced spouses is to sell the house or refinance the mortgage. in the name of only one of the former spouses. This spouse would then be responsible for making the mortgage payments.
These solutions work better because the other spouse no longer has to worry about missed payments or defaults that are the fault of their former partner. When divorced couples sell the home, they use the proceeds from the sale to pay off their loan. When they refinance the loan in the name of one spouse, the spouse whose name is no longer on the loan will not see credit decline even if the other spouse stops making payments.
But there are times when the ex-spouses can’t sell the house or refinance the loan. Maybe they want their kids to stay home. Perhaps neither spouse can qualify for a refinance on their own. In such cases, the former couple will specify how the mortgage is handled in their divorce decree, a less than ideal solution.
“The risk is that the bank or the lender can always sue both parties for recovery,” Vaughn said. “What if the spouse doesn’t pay the mortgage because that spouse has no money? Then you have a divorce settlement contract that’s basically worthless because it says that someone else is responsible and cannot pay.”
Spouses who can’t sell or refinance must put specific safeguards in the divorce decree, said Christian Denmon, founding partner of the Tampa-based law firm Denmon & Denmon.
For example, suppose the spouse who stays in the house plans to refinance the mortgage in their name. That spouse could agree to make the mortgage payments until they are able to complete the refinance. The spouse who no longer lives in the home might worry that their ex-spouse may not qualify for a refinance. This could cause her serious problems: her name would then remain on the loan, and if her ex-spouse stops making payments, her credit will also crash.
Denmon said the ex-spouse can protect themselves by requiring the divorce settlement to state that if their ex-spouse cannot refinance the loan within a certain time frame, the home will immediately be put up for sale.
Mortgage payments in a divorce settlement
Denmon gives another example: suppose the ex-wife keeps the house but her ex-husband, who has moved out, agrees in the divorce settlement to make the mortgage payments. The ex-wife might worry that her ex-spouse suddenly stops making the payments, which of course will cause her credit to plummet.
The ex-wife can protect herself by insisting on strong language in the divorce settlement indicating that her ex-husband’s mortgage payments are a form of alimony. The settlement may specify that if the husband does not make the mortgage payments, he will be held in contempt of court. In many states, a judge can then throw the ex-husband in jail if he doesn’t make required child support payments, a strong incentive for the ex-spouse to keep making those mortgage payments, a Denmon said.
“The key to protecting both spouses after the divorce is finalized is carefully crafted settlement language,” Denmon said.
But even these guarantees are not perfect. Even if a divorce settlement lists specific penalties for ex-spouses who fail to make their required mortgage payments, there is no guarantee that these responsible parties will follow the rules.
“Unfortunately, there is no surefire way to protect spouses who are co-mortgage debtors after divorce,” said Linda Kerns, a Philadelphia attorney. “The best solution is to refinance or sell. Ex-spouses should also remember that if the other spouse is sued, bankrupt or subject to a lien, it will affect joint property and make a situation complicated. even more complicated.”