Divorce, Bankruptcy, and Mortgage Refinance – Expert Advice
Hi there, and thank you for joining me today. I’m here with my buddy Murphy’s Law (pointing to statute). You know him. As the saying goes: “What could go wrong, will.” We’ve all been there; if you live long enough, a few things are bound to go wrong. But that’s what I’m here for—to help you through these difficult times. So today’s topic is dealing with marital property in a divorce, and how a mortgage refinance might be required to protect your credit utilization ratio, since a quit claim deed doesn’t offer protection from liability.
Key Points
- Divorce is a leading cause of bankruptcy, with medical bills and health issues being the top two reasons people file for bankruptcy.
- Marital property, especially the house, can be a major issue in divorce and bankruptcy, requiring mortgage refinance or a quit-claim deed.
- A quit-claim deed is a simple transfer of property, but it doesn’t necessarily protect you from liability if you’re still on the mortgage.
- If you’re still on the mortgage, you’re still responsible to the lender, regardless of the quit claim deed.
- Late payments by your ex-spouse can affect your credit score and credit utilization ratio.
- Your credit utilization ratio should ideally be at 30%.
- A specific date for refinancing or selling the property should be included in the divorce agreement.
- If there are trust issues, the quit-claim deed can be signed at the closing.
I know bankruptcy is a subject nobody wants to discuss, but ultimately, it’s all about walking down the path to financial freedom. And that’s what I’m here for. I’m your personal professor, Alex Hernandez.
Today, I’m going to talk about the issue of divorce. Divorce and bankruptcy often go hand in hand. Most people don’t realize that the top three reasons people file for bankruptcy are medical bills, health-related issues, and divorce. Sure, there are people out there spending money on things they shouldn’t and living above their means, but those aren’t the top reasons. Unfortunately, divorce is one of the top three reasons.
When it comes to divorce and bankruptcy, things can get complicated quickly. There are many issues at play, especially when dealing with marital property. The question often arises: Are you going to sell the house? Sometimes, parents agree to wait until the child turns 18 and then sell it.
Or will there be a mortgage refinance? You can give the property to the other spouse, but refinancing is the only way to protect yourself from the debt. This is an issue because divorcing couples use a quit-claim deed.
What is a Quit Claim Deed
Now, let’s go over what a quit-claim deed is. A quit-claim deed is simple enough; it is nothing more than a transfer of property. It’s a one-page form where everyone puts $10 for an interest of $10, and they transfer the property to you. But is that enough to avoid liability?
If you’re not on the mortgage, that’s one thing, but if you are, we have other issues. Many people, including my students, don’t realize this. That mortgage is based on contract law. You signed a contract with the bank, making both of you responsible for that mortgage.
Just because one or both of you decide to get off the title of the property, it doesn’t eliminate the original mortgage or “contract.” This contract issue is separate from what happens in family court.
The Impact of Divorce on Mortgages
If you stay on the mortgage, understand there are possible consequences. Your debt level remains the same until the mortgage is paid down. This means if you apply for credit, whether for a new car, home, or credit card, you could be denied because the bank sees you already have a mortgage.
Even if you have a divorce agreement stating you’re not responsible, you’re still responsible to the bank. The original contract with the lender remains. The judge can’t undo that.
As a result, this can affect your credit score. If your spouse makes late payments, it will impact your credit score. Disputing this on your credit report with divorce paperwork might not help much. Creditors look at the numbers. If a new creditor sees you owe on a mortgage, even if it’s paid timely, they might reject your loan unless you have a substantial deposit and sufficient income. This is because your overall debt is too high.
Your Credit Utilization Ratio Will Be Affected by a Mortgage
Your credit utilization ratio also matters. This works on what is called the 30% rule. To build your credit, the bigger the gap between what you owe and your credit limit, the better your score. The goal is to get it to 30% or below.
For example, if you have a credit card with a $10,000 limit and owe $7,000, that’s 70% utilization, meaning 70% of your credit has been utilized. Even if you pay on time, your available credit is 30%. Creditors like to see that you owe 30% of what you owe, not that you have 30% available. So, in this case, if you owe $3,000 on a $10,000 limit, it improves your score substantially.
My credit score recently increased because a credit card company increased my credit limit by $5,000-$6,000. This increased the gap between what I owe and my available credit.
For example, suppose I owe $5,000, and my total line of credit is $10,000. I have a credit utilization ratio of 50%. However, by increasing my credit limit by $5,000, my credit utilization ratio will drop significantly, improving my credit score. My score went up by 20-30 points.
Now, let’s return to the issue of the quitclaim deed. I’ve seen mistakes in court orders where judges don’t specify a date for refinancing or selling the property. They might say the parties will refinance or sell, but without a specific date, it can cause problems.
If there’s no date, “infinity” means “infinity.” Typically, lawyers put 90 to 180 days for refinancing, and the property must be sold if it can’t be done in that time. Make it date-specific to protect yourself. You don’t want this debt hanging around forever.
Now, imagine that without a specific mortgage refinance date listed in the court order, suppose five years later, your ex-spouse loses their job. This will affect your credit. Creditors don’t care about the reason; they see the numbers. So, be careful with that.
The Mortgage Refinance and the Quit Claim Deed
Another issue is the concern about whether your ex-spouse will actually go through with the refinance after you sign the quit-claim deed. You can sign the quit-claim deed at the closing if there are trust issues.
You might use a title company or a lawyer, depending on your state. Tell them to prepare the quit-claim deed for the closing. You can sign it on the same day, protecting you from signing it too early and having your spouse fail to get approved.
The key takeaway from today’s video is that a quit-claim deed won’t protect you 100% if you’re still on the mortgage. That contract with the lender remains unless there’s a refinance.
Divorce agreements might state that you have no responsibility for the loan, but that doesn’t apply to the lender. They can foreclose on both of you, and sometimes, people have to file for bankruptcy years after a divorce because there are no specifics about refinancing or selling the property.
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Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.
This transcript was edited for clarity.
Updated on April 29, 2025.
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