Lately we have been running into more and more couples that are either going through a separation, or a divorce. In many of these situations, one spouse wants to remain in the home – but the only way to do that, is to refinance the other person off of the mortgage. Many times, we find that folks who are going through a separation or divorce are not able to refinance (or purchase another house) because of credit issues that were created during (and after) the marriage. These situations have put us in a position of “counseling couples” and making them more aware of how to Protect Your Credit During Divorce.
Divorce occurs because of some level of conflict. Unfortunately, “the conflict” will sometimes result in folks who previously protected the feelings of someone they loved, into impulsive reactions aimed at an immediate hurtful result.
Often times we see this form of “striking out” come with some sort of financial disaster, and as a result, it hurts one or both parties, impacting credit reports. Because of this, there is an immediate need to Protect Your Credit During A Divorce.
We’ve seen so many divorce situations that actually “started” because of “money” problems. Even before the separation and divorce, there are bills that go unpaid. Even if the “finances” are in good shape going into the divorce (meaning money is not what is driving the divorce) – we’ve also seen spouses max out credit cards they think the other party is going to get “stuck” with paying. Depending on how the car was financed, the original “owner” of the credit card (for instance), one or both spouses can have a negative impact on their credit because of the divorce. This is why we suggest that each person in the divorce think about their credit scores – and take steps to protect themselves from the negative behavior of the other.
How To Protect Your Credit During A Divorce
It can be difficult to do by contacting each credit bureau, but you will REALLY need to see all of the information that is currently showing on your credit report. This is really the first thing you will need to do. Go ahead and get a Tri-Merge report, meaning that it contains all three major reporting agencies, Equifax, Experian, and TransUnion, and go through it very carefully. Your Attorney maybe able to help you with this – certainly your banker can help you with this too.
The report is going to identify each account and who is responsible for it. The accounts that need to be addressed immediately are the ones that are joint accounts and accounts were you are listed as an “Authorized User.” Once those accounts are identified:
- Immediately freeze the accounts that are joint accounts, so that the other spouse cannot further increase the balances.
- Remove the other spouse from the account if they are an authorized user on it, for the same reason.
- Remove yourself from the other spouses account if you are the authorized user.
- As an extra safety measure close accounts that the other spouse is a join or authorized user on, and transfer the balance to an account that is just in your name.
However, there are accounts that the above steps won’t work with an installment loan like a mortgage or car loan. In those cases there are only two options, sell the car (or boat or Motorcycle – you understand what I’m saying) or refinance it into the name of the spouse that is going to keep it. The good news is that Student Loans are generally only in one person’s name to begin with!
QuitClaim Mortgage / Protect Your Credit During A Divorce
There is a ‘Urban Myth” in North Carolina that you can simply go to the Court House and remove someone from the Deed – and that person is no longer responsible for the property. If the home, or commercial property is owned with no mortgage – then that works. If there’s a mortgage on the property, then it doesn’t. There’s a “misconception” that if a spouse is ordered by the court in a divorce decree to pay a debt that the other spouse is protected. WRONG!
The fact is that a divorce decree does not override any agreement made with a creditor. Meaning – if you BOTH signed the loan application for the Mortgage – you are BOTH responsible for the Mortgage.
We had a situation where the couple split-up – they agreed that the husband would stay in the house until it was sold. The market was pretty bad at that time in Ohio, and they knew it could take a while. The wife agreed to pay one half of the mortgage payment to the Attorney, and the husband was supposed to pay the other half – and the attorney was supposed to forward the payment to the mortgage company.
That worked just fine for about 6 months. The husband lost his job – the wife relocated to NC, and then moved again. The husband had no rights to see the children, nor was he required to pay child support. The woman was supporting herself and her children, and sending her $612 to the attorney every month. She didn’t see the need to force him to refinance and take her off the mortgage during the divorce.
Six more months pass – and the house is FORECLOSED ON, and the woman never knew it! She applied with us for a mortgage, and we showed her the foreclosure on her credit report. I was there – she genuinely did NOT KNOW that the payments had not been made. The attorney had been cashing her checks, and sending them to the Mortgage company – but it was only half of the payment.
What if she’s done a Quitclaim of the Deed? Would that have protected her?
Quitclaim deeds are often used to transfer title between family members. For instance, Steve’s Dad owns a large tree farm in Virginia. He owns it free and clear (there’s not a mortgage on it). If he wants to go ahead and break it up, and pass ownership to Steve and his sisters, he would likely do that with a QuitClaim Deed. If his dad wanted to put the land into some sort of Trust, that he or his Estate would then manage – he would probably transfer the title (ownership) of the property with a QuitClaim (we sometimes call them Quick Claim) Deed.
A Quitclaim deed is a legal instrument by which the owner of a piece of real property, called the grantor, transfers any interest to a recipient, called the grantee. The owner/grantor terminates (“quits”) any right and claim to the property, thereby allowing claim to transfer to the recipient/grantee.
Unlike most other property deeds, a quitclaim deed contains no title covenant and thus, offers the grantee no warranty as to the status of the property title; the grantee is entitled only to whatever interest the grantor actually possesses at the time the transfer occurs. This means that the grantor does not guarantee that he or she actually owns any interest the property at the time of the transfer, or if he or she does own an interest, that the title is free and clear. It is therefore possible for a grantee to receive no actual interest, and – because a quitclaim deed offers no warranty – have no legal recourse to recover any losses.
Further, if the grantor should acquire the property at a later date, the grantee is not entitled to take possession, because the grantee can only receive the interest the grantor held at the time the transfer occurred. In contrast, other deeds often used for real estate sales (called grant deeds or warranty deeds, depending on the jurisdiction) contain warranties from the grantor to the grantee that the title is clear and/or that the grantor has not placed any encumbrance against the title.
In a situation where there’s a Divorce, and there’s a MORTGAGE on the property – a QuitClaim Deed is really not the instrument to use. The only way that would have helped, would have been if the house actually SOLD – and they wanted an easier way to transfer the title, without her having to sign at the closing. But the Quitclaim itself does NOTHING to protect either spouse if the house payments are not made… even if there’s a ‘Hold Harmless Agreement” or the Separation or Divorce Decree says that the other spouse is responsible. If you signed the Loan Application, and you were on the Note to pay the mortgage – you will continue to be on the hook unless the house is refinanced OUT of your name, or the home is sold.
If you are going through this, our hearts go out to you. You also need to consider how Alimony and Child Support payments are considered when you apply for a mortgage. There are Single Parent Grants** available to help you in buying a home – but you will need to do everything possible to Protect Your Credit During A Divorce.
**A Quick Note
We refer to these programs as “mortgage grants” because there are no payments to be made, there is no interest charge, and there’s no expectation that you will have to repay ANY of the money you receive for down payment, unless you move out of the property or refinance prior to the dates assigned by your specific down payment assistance program.
The literal term for this down payment assistance program is a “forgivable loan.” Under the terms of the program that best suits you, a portion of this down payment assistance will be forgiven on a schedule that we will share with you when you make loan application. These funds are available to us through NC Housing (NCHFA) and are available through other lenders in the state as well. The interest rates for these programs, however, will not vary from lender to lender as that is set by NC Housing.