Q: I am going through a divorce. We’ve closed our joint accounts but we still have a mortgage together. I am moving out but he is keeping the house. The bank will remove my name from the mortgage if he refinances the house in his name only. I don’t want to ruin my credit. What should I do?
A: Maintaining a good credit rating while going through divorce can be very tricky. On the one hand, even if the two parties who are separating can agree on how assets and liabilities (like that mortgage) are supposed to be split, that does not mean that your creditors are bound to those terms.
In fact, whatever deal you work out with your soon-to-be ex-spouse has no bearing whatsoever on your legal responsibility to repay debts for which you and he were both co-signers. In a nutshell, this means that if the two of you co-signed for credit cards, your house, a car note, or anything else, then your creditors can still legally come after either one of you for repayment.
Let Your Ex Refinance the House ASAP
If what you’ve stated is correct, and the bank is willing to take you off the loan once your divorce is finalized, then you are in a far better position than most people. Frankly, lenders don’t just automatically remove people from loans simply due to divorce.
In your situation, it could be the case that your husband has already shown the bank his finances (or gotten pre-qualified for a new mortgage), and the bank knows that he could qualify for a home loan on his own. If so, he can simply refinance your existing mortgage upon your divorce and put the house in his own name.
Either way, it is clear that the longer it takes to get that divorce decree, the more potential exposure you have in terms of protecting your credit rating. Conversely, the sooner you can get that divorce decree, the less risk you face that your credit could be ruined by his potential failure to pay.
How to Protect Yourself
When a home is involved in a divorce proceeding, and both individuals are on the mortgage, the single best way to protect the credit rating of both parties is to sell the home. This way, the bank gets paid off and your joint obligation is satisfied.
Of course, the two of you will have to decide how to split the proceeds from the sale of the house – another potentially thorny issue. But it’s far less dicey than sweating it out month after month, and keeping your fingers crossed hoping your ex will pay the mortgage as agreed.
I realize, of course, that for a host of reasons, some people may not want to sell a home, even if they are divorcing. Maybe the house still has sentimental value, to one or both parties.
Perhaps kids are involved and you want to keep the house to provide stability to the children. Or maybe you’re reluctant to sell simply because it’s a rotten housing market in your local neighborhood. Whatever the case, selling may not be practical or feasible. If it isn’t, consider another option.
Tighten Up That Property Settlement Agreement
As stated, your divorce agreement – even after it’s signed off by a judge – doesn’t have the legal right to change the terms of your original mortgage agreement. Those terms and repayment stipulations were locked in when you both signed for the home loan. What you can do, however, is include in your divorce agreement (sometimes called a Property Settlement Agreement, or PSA) a strongly-worded paragraph that addresses several aspects concerning the house.
First, your PSA should note that your ex-husband is assuming full ownership of and liability for the home. Next, the PSA should state a certain effective date that he is solely responsible for the house – including the mortgage, property taxes, maintenance on it, etc. Additionally, include a clause indicating that until the divorce is finalized, the mortgage company is to also give you a copy of the monthly statements. That way you can keep an eye on things and bring up the issue early on if he doesn’t pay.
Consequences of Non-Payment
Lastly, the PSA should note financial penalties and consequences that are imposed in the event that he doesn’t pay. For example, for every missed payment – or every payment that’s 30 days late – he might be forced to make a certain cash payment to you. Moreover, you could insert a phrase stating that his failure to pay the mortgage effectively amounts to a judgment in your favor against him.
If it turns out that you ever have to pay the mortgage company to preserve your credit rating, you can take your ex to small claims court, or use that judgment against him to garnish his wages and seek other legal remedies. A good attorney will be able to help you word this appropriately in your Property Settlement Agreement, and advise you about your state laws.
Why Your Separation Date Is Critical
One final bit of advice: You stated that you will be moving out of the home in the future. Be sure to consult an attorney in your area for insights into two areas that may be impacted by your planned move. First, if you have kids, and you want to keep custody (or even have joint custody), find out whether or not moving would in any way jeopardize your ability to retain custody. Additionally, understand how your state looks at your “Separation Date.” Is it the date divorced papers were filed, the date you moved out of the house, or simply the date that you formally told your spouse that you wanted a divorce?
Different states count your separation date in different ways. But this date is a vital legal benchmark. This date is crucial because it can determine a host of financial aspects, such as your credit, alimony, pension benefits, the date at which the market value of the home is assessed, and so on. In general, most states won’t hold you responsible for debts your ex-spouse incurred after your separation date. But debts amassed before then are often considered owed by both parties.