What You Need to Know About
Your Mortgage, Credit and Estate
When Getting Divorced
By Mark Morrison
Divorce Mortgage Planning Specialist
So you have either made the decision to get divorced mutually or you or your spouse have petitioned for it, so what do you do now? First, you must protect yourself and this means your credit, assets, home equity, dependents and estate. Most people, going through a divorce, immediately concentrate on their liquid assets, but few ever consider the potential impact on their credit and the equity they have trapped in their home. This paper will give you a step-by-step process to protect both.
Your first step is to ask your attorney to negotiate with your spouse's counsel to allow a home equity line of credit to be taken on the marital residence and pay yours and your spouse's legal fees from this line. I have seen too many divorces that linger on and the parties run out of cash to continue to pay their legal fees. By the time they have come to grips with their predicament their credit cards are maxed and their credit scores are too low to refinance their existing mortgage leaving all their home equity trapped and forcing them to sell the marital residence from a position of weakness. This is not a position you want to be in!
Next, cancel all joint credit cards and open new lines of credit in your name only. Make sure that the previous accounts have your new address including your mortgage company, and that the invoices come to you to ensure that they are paid in full. Your attorney will negotiate with you spouse's counsel on the exact split of this debt, but for now it is important that you remain on top of open account balances and insure they are paid on time. You can't afford to have late payments reporting on your credit especially if you intent to purchase a home of your own when your divorce is complete.
Place a Fraud Alert on your credit file by calling one of the three credit repositories. Once you file an alert with one repository they notify the other two on your behalf. This alert will not only make it difficult for identity thieves to steal your personal information, but it will also complicate a vengeful spouse's attempt at opening credit in your name without your knowledge. While requesting the fraud alert I suggest that you enroll in one of the repositories credit protection subscriptions.
For a nominal annual fee you will be notified when your credit file is accessed, account balances changed by a given percentage or new accounts have been opened. If you are going through a truly contentious divorce and your spouse is particularly bitter then I suggest forgoing the Fraud Alert and request a Credit Freeze. This will stop everyone, for the exception of government agencies, from accessing your credit profile.
If you think that this couldn't happen then I will share a story. I had a client, a doctor, going through a terrible divorce. Once the divorce was settled he went to purchase a new home and had his credit report pulled. On the report was a credit card he did not recognize with a balance of $60,000 plus dollars. Yes, his former wife applied for a credit card in his name, charged it up, paid the minimum payment till after the divorce and left my client with the balance to pay. It definitely happens!
Should we sell the home or should I give it to my former spouse? In retrospect, my client Sandra should not have let her ex-husband keep the house. When Sandra and her husband divorced in June 2005, they decided he would continue living there with their daughter. The plan was for him to refinance the property within 90 days of the divorce and become the sole debtor on the mortgage. That never happened and now the mortgage payments have been late or not sent at all, and the house is in foreclosure.
The result: Sandra's credit is in shambles. Sandra now lives with a friend and can't take on a mortgage of her own, because she is still the primary holder on the existing loan. Sandra's credit was impeccable, but what her husband was responsible for, with Sandra as the cosigner, has ruined all her good credit history.
What Sandra should have done is have her ex-husband, prior to the divorce being final, apply for a mortgage in his name solely, secure a commitment for this loan and then close on the new loan simultaneously to endorsing the divorce documents. This would have ensured several things: 1) Sandra would have known early on if her former spouse could secure a loan based on his credit and income alone and thus relieve her responsibility of the debt, or 2) That the husband could not secure a loan and the property could be listed for sale. Either way, Sandra would no longer have responsibility for the debt, she would receive her share of the property equity and her credit would be secure.
Fact is, even if the divorce decree spells out clearly who is responsible for what after the divorce, the decree doesn't override the original contract with the creditor. Creditors will go after both parties, with equal vigor, just as they weren't divorced.
How does alimony and child support affect your mortgage? Critically! When you apply for a mortgage or if you are keeping the marital residence and have to refinance the existing loan these two costs or sources of income will be used to qualify you for your future financing. Lenders are going to ask to see the settlement agreement or temporary support documents to determine how much of a loan you can afford and if you are paying alimony, child support or both these will likely reduce the loan amount you qualify for.
If you are on the receiving end of this support, lenders will want to ensure that you will receive this support for at least another three years and that you have been in receipt of these payments for at least the last three months. This point is imperative: I suggest that all support payments be paid to the court and in turn the court will funnel those payments to the recipient. Additionally, it is important to establish a separate account solely for receipt of these payments to simplify evidencing receipt of support to future creditors well as accounting for year-end purposes. If you are the party having to pay the support make sure that the settlement agreement spells out the date the payments begin and end and the age and
birthdates of minor children.
Divorce also forces you to review your estate plan especially if there are children involved. Part of this plan also includes the creation or continued funding of college tuition plans. First, review any life insurance policies you may have and change the beneficiary from your spouse to either your next of kin or in the case of minor children to a guardian in trust for the children. Changing the beneficiary may be more involved, legally, if your insurance policy has a cash value because this value may be considered martial assets.
If neither spouse has insurance and there are minor children, it is a good policy to require both parties to have insurance in place with the minor children as the beneficiary with a trustee. It would also be prudent to have an Estate Attorney create a Pour-Over-Will that flows into a Revocable Living Trust and assign a trustee to administer the will and trust. Proper estate planning is critical to protect your loved ones from having to go through probate and risk the loss of critical assets for young children.
Qualified tuition plans, if not currently established, should be created on behalf of the children and be guaranteed to continue to be funded or funded as part of the divorce decree. In many divorces one spouse will take the children as an income deduction. This deduction, for proper college planning, should be claimed by the spouse with the least income to maximize future financial aid for college tuition.
It is also advisable when starting a qualified tuition plan that the plan owner be grandparent and not the parent. When your child applies to college they will automatically complete a FAFSA application for student aid. This application requires the parent claiming the child on their income taxes to reveal all of their income and assets. A qualified tuition plan is considered a parental asset even though it is for the child's education and thus reduces the child's overall aid, but by having a grandparent as the owner of the qualified tuition plan the asset does not have to be revealed and the grandparent suffers no gift tax consequences.
Consider this, hindsight is twenty-twenty! What I mean is those who prepare for the worst, but expect a positive outcome find themselves landing on both feet. Divorce actions have a tendency to become acrimonious and take longer and cost more than both parties anticipate. Plan for the worst but expect the best and you will exit this time in your life fiscally intact.
Copyright (c) by Mark Morrison 2008 ALL RIGHTS RESERVED
Mark Morrison has been in the mortgage business for 20 years. He can be reached at 240-390-2230 or 1-800-851-3730.
You can read more on mortgages, divorce and money at http://divorceandmoney.blogspot.com or his daily posts on mortgages & real estate at http://mortgagesbymark.thewrittenblog.com
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