Most folks, when it comes time to split the sheets, go through a predictable set of steps - marriage counselor, divorce lawyer, mediator, judge.
During this time, everyone is focused on dividing the sheets. And the debt, the mortgage, the cars, the house, the kids, and the unresolved anger, emotion, disappointment and communication.
There is one thing uniformly left out of this process - the creditors. Here in Texas, as with any community property state, the debt incurred during the marriage is generally considered to be the joint responsibility of the marital community, regardless of how the debt was incurred. If either spouse has ever had signing privileges, or was involved in the making of a debt, they’re each 100% responsible for the entire debt owed. In equity (non-community) states, the rules are only slightly different.
Think about that for a moment - they don’t each owe 50%, they each owe 100%.
In the divorce case, there is the name of the one spouse, the name of the other spouse, the names of all the children, if any .. but no where on the top of the divorce suit does it include “Countrywide Home Loans, GMAC, HSBC, Capital One,” or “Citibank.”
Of course, anyone can see that the creditors aren’t on the lawsuit - but no one takes a moment to reflect on that the creditors are NOT affected by the divorce suit.
The divorce decree, crafted after months or years of tears, screaming, swearing and effort divides the debt. Each spouse leaves the marriage with some portion of the marriage community’s debt, and the decree may (but likely doesn’t) spell out that the debt is to be cleaved away from the other spouse. Armed with the Court’s decree, the former spouse starts their “new” life, unaware that there is a time bomb in their credit report - the divorce isn’t REALLY over yet.
Some lenders will allow the removal of the former spouse - send us a copy of the divorce decree, and we’ll take them off. However, in the event of a default, the creditor hasn’t given up the right to pursue the former spouse for their share of the debt incurred prior to the divorce.
On the mortgage, it is the very rare loan that can be modified to remove a spouse who is no longer in title. To get completely free of the financial obligation on that mortgage, the spouse who remains in title has to refinance - create a new loan that fully resolves and pays the old loan.
Bottom line - to free ones self from the marriage financially, not only must the asset accounts be split apart and separated, the debt accounts must also - and the only sure way to do that is to open NEW debt accounts, solely in the name of the spouse who is going to be responsible for that debt, and then pay off fully the debt that was jointly incurred.
When dealing with the credit cards and car loans, it’s pretty straight forward - a few online or telephone applications, and a few days later, the new coupon book arrives. With the mortgage, though, the whole lending process must be re-created, and all of the customary fees apply. Title work, escrow, appraisals, credit, income verification, all of it.
Usually, in a divorce decree, a very short period of time is allowed for the departing spouse in title to the property to be made whole - paid out their equity.
One common error that lenders make is that the spouse who is departing in title and taking equity characterizes the entire transaction as a “home equity” loan. It is not.
The divorce decree creates a lien based in owlty (sometimes spelled owelty,) which is the lien to secure payment of that interest someone has in property as they depart title. Even many divorce lawyers are unfamiliar with the owlty concept - as well they could be - even the legal dictionaries are silent on the term.
The best definition I’ve ever found of owlty is:
The difference which is paid or secured by one coparcener to another, for the purpose of equalizing a partition.
If you’re a divorce lawyer, and advising a client on resolving their debt picture after the divorce, try putting them on a track to completion by negotiating refinance/remaking of ALL the marital debt before or at formalization of the divorce decree. If either of the spouses cannot qualify to refinance or remake some portion of the debt, have the property settlement structured to pay that debt off if at all possible.
If you’re getting a divorce, ask your lawyer about protecting your interests by having your divorce decree reflect a short time period for each spouse to either fully pay off the marital debt or to fully refinance it with new debt.
If you’re a lender, be aware that if one spouse is coming off of title, it’s not home equity, but owlty.
In the absence of these protections, a divorced person likely will find themselves uncomfortably challenged years after being “through” with the divorce process, when their credit is affected by ratings or balances associated with debts they thought were long resolved. These late rising concerns can disturb the financial peace of new relationships, interrupt new home or car purchases, and even bring on the necessity of bankruptcy.