Divorce is painful, complicated and often messy. And when there’s a mortgage loan involved? That makes life is even more complicated for spouses who are separating.
Ideally, spouses either agree to sell their home or refinance their mortgage so that only one person’s name is on it. That former spouse is then responsible for making the mortgage payments each month.
Unfortunately, this idea isn’t always attainable. Often, one spouse will remain in the home. The divorce agreement will then spell out who is responsible for paying the mortgage.
This can lead to serious problems: What if the spouse who lives outside the home is supposed to pay the mortgage but stops doing so? This will cause the other spouse’s credit to plummet. This spouse’s name remains on the mortgage, so missed payments will drop this owner’s credit score just as severely as it will the spouse’s who was supposed to pay.
"A jointly acquired home loan has the unfortunate potential to become a disaster for your credit during a divorce," said Michelle Black, president of Hope4USA, a credit-counseling service in Charlotte, North Carolina. "Your mortgage lender will not care about your divorce decree. Your divorce decree will in no way resolve you of responsibility for a jointly acquired mortgage loan."
The unfortunate truth? When it comes to divorce and mortgage loans, you can take safeguards to protect your credit. But you can never guarantee that the mistakes of your former spouse won’t drag down your credit score, too.
The best options
Andrew Vaughn, owner of Chicago law firm NuVorce and a professor of advanced domestic relations law at Loyola University Chicago School of Law, said that the best solution for divorcing spouses is to either sell the home or refinance the mortgage in the name of just one of the former spouses. That spouse would then be responsible for making the mortgage payments.
These solutions work best because the other spouse no longer has to fear missed payments or loan defaults that are the fault of their former partner. When divorcing couples sell the house, they use the proceeds of the sale to pay off their loan. When they refinance the loan to one spouse’s name, the spouse whose name is no longer on the loan will not see a credit drop even if the other spouse stops making payments.
But there are times when former spouses can’t sell the house or refinance the loan. Maybe they want their children to stay in their home. Maybe neither spouse can qualify for a refinance alone. In such cases, the former couple will spell out how the mortgage is handled in their divorce decree, a less-than-ideal solution.
"The risk is that the bank or lender can still pursue both parties for collection," Vaughn said. "And what if the spouse isn't paying the mortgage because that spouse has no money? Then you have a divorce settlement contract that's basically worthless because it says someone else is responsible who can't pay."
Spouses who can't sell or refinance need to put specific safeguards in the divorce decree, said Christian Denmon, founding partner of Tampa-based Denmon & Denmon law firm.
For example, say the spouse who stays in the home plans to refinance the mortgage into his name. That spouse might agree to make the mortgage payments until he is able to close the refinance. The spouse who is no longer living in the house might worry that her former spouse will not be able to qualify for a refinance. This could cause her serious problems: Her name would then remain on the loan, and if her former spouse stops making payments, her credit, too, will crash.
Denmon said that the former spouse can protect herself by requiring that the divorce settlement state that if her former spouse can't refinance the loan within a certain time period, that the home will immediately go up for sale.
Mortgage payments as part of divorce settlement
Denmon gives another example: Say the ex-wife keeps the home but her former husband, who has moved out, agrees in the divorce settlement to make the mortgage payments. The ex-wife might worry that her former spouse will suddenly stop making the payments, causing her credit, of course, to plummet.
The ex-wife can protect herself by insisting on strong language in the divorce settlement stating that the mortgage payments from her former husband are a form of alimony. The settlement can spell out that if the husband doesn't make the mortgage payments, he will be held in contempt of court. In many states, a judge can then throw the ex-husband in jail if he doesn't make his required alimony payments, a strong incentive for the former spouse to keep making those mortgage payments, Denmon said.
"The key to protecting both spouses after the divorce is finalized is carefully drafted settlement language," Denmon said.
But even these safeguards aren't perfect. Even if a divorce settlement lists specific penalties for former spouses who fail to make their required mortgage payments, there is no guarantee that these responsible parties will follow the rules.
"Unfortunately, there are no foolproof ways to protect spouses who are co-debtors on a mortgage after a divorce," said Linda Kerns, an attorney in Philadelphia. "The best solution is to refinance or sell. Former spouses must also remember that if the other spouse is sued, goes bankrupt or has a lien filed against them, that will affect the joint property, and make a messy situation even more complicated."