With all the problems that can arise from marriage, especially when it falls apart, it’s a wonder anyone ever ties the knot.
Here’s this week’s question:
I’ve been divorced for 3 years. In the process of working out a divorce settlement I agreed to a cash settlement, while my ex-husband retained the house. Although I gave up the house, I was not able to remove my name from the mortgage because my ex was unable to secure a loan, based on his credit alone. Part of our settlement was an agreement that he would remortgage as soon as he was able. But in the past 3 years, not only has he been unable to remortgage, he’s actually managed to come within weeks of a foreclosure on the home. Is there anything I can do legally to remove my name/my credit from the mortgage (and his poor financial management) so I can move on with re-building my own credit?
The thing about debt is, it looks different depending on who’s doing the looking. For example…
How Kathryn sees this debt
When you’re standing in the shoes of an ex-spouse, being held responsible for a debt like this must seem indefensible.
Kathryn doesn’t own the house and doesn’t live there. A court gave the house to her ex, and he agreed to refinance it and get the mortgage out of her name. Why should she have to worry about it?
How Kathryn’s lender sees this debt
When you’re standing in the shoes of a lender, going after Kathryn is totally defensible.
When Kathryn and her ex applied for this mortgage, they both agreed to be individually responsible for the entire debt. They didn’t say they’d stop paying if one or both of them no longer liked the house or each other. They didn’t sign anything saying one could get off the hook if they got divorced, or one signed their ownership over to the other.
What they agreed to in writing was that they were both fully liable for the entire debt, come hell or high water.
And now, here it is: hell and high water.
Both points of view are understandable. Unfortunately for Kathryn, however, the only view that matters — the one a court would recognize — is the lender’s.
It’s important to remember that although you’re free to merge ownership of just about anything — married or not — your credit is your own. There are no joint credit histories. When you sign your name on the dotted line, you’re obligated. The only way to remove yourself from a joint debt is to remove the debt, either by paying it off, selling the asset, or refinancing it in the other person’s name.This should have been provided for in the property settlement. The agreement shouldn’t have said her ex was to refinance and take her off the mortgage “as soon as he was able.” It should have given him a fixed amount of time.
This is a common problem, especially in the years after the housing bust. It’s also one I’ve dealt with personally. When I got divorced years ago, I took the house, along with the mortgage. The settlement specified I had 18 months to get my ex’s name off the loan. That left me with three choices: sell the house and pay off the mortgage, pay off the mortgage from my savings, or refinance the mortgage in my name alone.
Fortunately, I wasn’t underwater on the house and had the financial wherewithal to refinance, which is what I did. Had I not been able to refinance, I would have been forced to sell the house. Had the house been worth less than the loan, the loss would have been mine. Everything was neatly spelled out in the property settlement.
It could have been worse
While it was impossible for Kathryn to predict the lousy outcome that’s befallen her, one could at least argue she knew what she was getting into. After all, she did sign the loan paperwork. But there are some situations where she could have been liable for other marital debts she didn’t agree to, or even know about.
In Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — community property states — a spouse can be liable for debts entered into by the other spouse during the marriage, even if they were unaware of them. In these states, debts entered into during the marriage are considered community debts, and both spouses can be liable.
However, if only one spouse files Chapter 7 bankruptcy in a community property state, community debts could also be wiped out.
In the rest of the country, if you don’t sign, you don’t owe, married or not. That’s the general rule, but laws vary by state. If you’re interested in learning more, read articles like this one from Nolo.com; it has lots of good info and isn’t hard to understand.
What should Kathryn do?
What Kathryn obviously should have done when she got divorced is make sure that when her husband got the house, he got the full debt that went with it, along with a ticking clock. That apparently isn’t what happened, though. What now?
Her first call should be to her divorce lawyer, since he or she is the one who got her into this mess by not providing a time limit for the removal of Kathryn’s name from the mortgage. If that doesn’t work, she could consult with a consumer lawyer. Initial consultations are generally free, and she’ll probably get the information she needs in a few minutes.Another option, which may or may not work, is to write to the three major credit reporting bureaus: Experian, Equifax and Transunion, enclosing a copy of the property settlement and explaining she’s no longer the owner of the house, isn’t liable for the debt and her credit shouldn’t suffer because of her ex-husband’s bad habits.
She should also write the mortgage company and request that since she’s liable on the loan, she should be notified if payments are late.
If she can’t borrow for another house because of this mortgage, she could go through a similar process with any new potential lenders: show them the settlement so they can see she’s not liable for the old mortgage and it shouldn’t affect her credit or borrowing capacity.
Finally, she should contact her ex, or have her lawyer do it, and tell him to do what he legally agreed to do: extinguish this debt, one way or the other. If he can’t refinance, he should sell. If he owes more than the home is worth, he could try a short sale, although that may hurt Kathryn’s credit as well as his.
The moral of the story
Kathryn wasn’t being irresponsible. Sometimes stuff just happens – stuff you can’t foresee. That’s life.
The one thing to take away from this story is to be careful when you borrow. Don’t co-sign loans for other people. Don’t sign loan documents just to be nice. Be aware that bad things, like divorce, happen, and even those with the best intentions can unintentionally leave you in a lurch.
And should things go south, spell everything out in the settlement.
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I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.
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