Obligated to Pay Debt
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
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
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.
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
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 Turn 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.
Language in Your Decree.
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:
- Ties the debt or mortgage
payment in as part of the financial support; and
- Limits the obligated
party's ability to bankrupt out of the debt; or
- 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
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
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 my 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
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.
representation call 612-240.8005
Call (612) 240.8005
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