Protect Your Credit After Divorce
Divorce can have a lasting effect on your credit if the decree is not properly written. In particular, the provisions about the marital residence need to cover all contingencies. In Texas, the property division section of a divorce decree cannot be changed, re-opened or modified, so it must be done right the first time. Your lawyer can make sure that you are protected.
The party who is not awarded the house will usually execute a Special Warranty Deed conveying his or her interest in the house to their ex-spouse. The party who is awarded the house should execute a Deed of Trust to Secure Assumption. This provides a little protection to the person who was not awarded the house. It gives the other party a lien on the house, after the bank’s lien, in case the mortgage isn’t paid. But both parties are still on the mortgage and ultimately liable for the debt.
The divorce decree can award the house to one party or the other, but that does not change the mortgage documents. If the person awarded the house doesn’t pay the mortgage, the bank will still come after the other former spouse. Even one missed or late monthly mortgage payment will appear on your credit even if you are not responsible under the divorce decree for paying the debt. The missed payments and foreclosure will go on the credit reports for both parties, and will stay there for years. It can prevent either one from buying another home, and can damage the credit rating.
Many people try to avoid this by inserting a requirement that the person to whom the house is awarded will refinance the house. But that is often impossible. Impossibility is a defense to an enforcement proceeding.
The income and assets of both husband and wife were part of the initial qualification decision by the mortgage company or bank. Very often, one party cannot qualify by themselves for the same mortgage. And so the request to refinance is denied. Both parties remain responsible for the money but only one has the house.
This collateral damage on your credit can be avoided. The easiest way is to agree to sell the house and divide the net proceeds. This can be done before or after the divorce is final. If the sale is to happen after the divorce, then the decree should contain provisions for how the sale will be conducted and provide for the appointment of a receiver to handle the sale of the parties are not able to cooperate on the sale. Your lawyer can help draft the language.
The next option is to set a limited period of time – maybe 90 days – for the party awarded the house to refinance. Then there should be provisions in the order for sale of the home, by the parties or by a receiver, if it is not refinanced by the end of that period. That gives the person plenty of time to check with several banks to find out whether a refinance is possible. Then it provides a framework for what happens next.
Doing this right the first time is relatively simple and not nearly as costly. Getting it wrong can leave you with years of financial problems and consequences. Now you have the information to work with your lawyer to do it right and protect yourself.