The Effects of Divorce on Real Estate

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The bottom line on this question is always, "Whatever the courts say." Divorce law is complex and even when you think you've got a clear message in the law as written, the courts may interpret it differently, or there may be precedent that says otherwise, or even just some overarching concern you are not aware of. Even if the law is clear, it can usually be gotten around by the agreement of the parties. Consult your attorney.



With that said, there are a few rules of thumb to go over, valid in broad for most states in most situations.



Real Estate is usually owned by both partners in a marriage equally, even if one spouse acquired title prior to the marriage the second will be added by default when the marriage happens. The only thing that is usually held separate are inheritances - things that were inherited by one spouse or the other from relatives, and even those can often become joint property. Sometimes gifts to one spouse can also be held separate. One of the phrasings your learn from reading title reports are is "John Smith, who acquired title as a single man, and Jane Smith, husband and wife as joint tenants." This tells you John bought it before they were married, and Jane got added to title upon marriage by the effects of the law.



There are trusts and the like to frustrate this from happening, and most states have rules and law permitting them, but you have to talk to the lawyer, get the trust created, and most importantly, as it's the step that is most often omitted, transfer the assets to the trust in a timely fashion. I don't know how many folks I've seen who spent a couple of thousand dollars creating a trust and then didn't transfer the assets to it. Every penny they spent on that trust was wasted money.



Now, if Jane does not wish to be added to the property title, she may quitclaim it back to "John Smith, a married man as his sole and separate property." However, quitclaim deeds have this curious limitation in many states (California among them) that they only function with respect to the interest you have in the property as of the time you sign them. Since the new spouse has not yet been given the claim upon the property until the marriage takes place, the quitclaim cannot be signed until after the marriage in order to accomplish the desired goal, as Jane has not yet acquired the interest in the property. Jane can say she'll sign it after she's married, but if she changes her mind, that's a whole different legal struggle. If she signs it before the marriage, then since she subsequently acquired a claim to the property through the marriage, she now has an interest in the property through the eyes of the law. Let's even say John and Jane are ninth cousins, the only surviving family inheritors, but for whatever reason Jane quitclaims the property to John, but then they later get married. Jane now has a married woman's legal interest in the property. The quitclaim only applies to Jane's interest in the property at the time of the quitclaim, and has no effect upon any claims she may acquire later. The only way I am aware, in general, to deed away any rights you may acquire in the future is with a Grant Deed, and each state has its own laws as to how this may and may not be accomplished. On the other hand, a Quitclaim is a handy document if you may have the intention of acquiring some interest in the property back at a later time, as it generally doesn't make, for instance, buying the historic family homestead back from your wastrel brother problematic.



Now suppose John and Jane Smith get divorced, and the property was held jointly. Both John and Jane still have an interest in the property, and continue to hold an interest, even if the court orders them to sign a quitclaim, until they actually have done so. This is why it is better to get a court award of actual title rather than a court order for the other spouse to sign a quitclaim. Unfortunately, for some reason, most divorce courts are unwilling to award actual title rather than order the ex-spouse to sign the quitclaim. So whoever gets the title or possession is not able to do anything with the property without the ex-spouse's approval, unless and until that ex-spouse signs the quitclaim or the court awards the spouse in possession with clear title. I could tell stories of ex-spouses that disappeared, or pretended to disappear for years leaving the ex-spouse in possession unable to sell, unable to refinance, even unable in some circumstances to sign a valid lease. Not infrequently, the ex-spouse pops up years later wanting a better deal (that is, more money) as inducement to sign the quitclaim deed.



Until the ex-spouse signs the quitclaim, title companies will not insure either loans, either in support of refinancing or a sale, or actual sales transactions. No lenders policy of title insurance, no loan (in most states), and that kills the refinance, or the loan financing any sale. No policy of owner's title insurance, and I certainly won't pay my money for a property, and advise my clients in most stringent terms not to do so.



Now, let's say that the ex-spouse has signed the quitclaim but is still on the existing loan, which was taken out while you were still married. This isn't really a problem. In order to refinance, or deliver clear title on a sale, that loan needs to be paid off. The lender doesn't care how it gets the money, or from whom. That ex-spouse can drop off the face of the earth once the quitclaim is signed, and it really doesn't make any difference. Once they are out of the legal picture, they might as well be dead. Both of you are responsible for the entire debt. It's not like some is His and some is Hers. Now, because this is true, sometimes ex-spouses also get their credit hit when things like a short sale subsequently happen, or foreclosures. To guard the ex-spouse who is giving up the rights to the property from this happening, many times the divorce court will order the ex-spouse who is retaining possession to refinance in order to remove the spouse who no longer has a legal interest in the property from future liability on the debt.



Many times, the court will order the ex-spouse retaining the property to buy the relinquishing ex-spouse out of the property, to give them some money or other goods in exchange for their interest in the property.



Often, especially if both spouse's incomes were used in order to qualify for the loan on the property, the remaining ex-spouse will not be able to qualify for the necessary loan on their own. In this case, the smart thing to do is usually sell the property. It is a real issue that because many former spouses are delinquent in their payment of alimony and child support, the lenders want to see a certain history (usually three months) of these items being paid before they will allow the income so generated to be used to help qualify the remaining ex-spouse for the new loan.



Keep in mind that all of the above are simply common concerns and happenings, and may have nothing to do with the situation you find yourself in in a divorce. Consult your attorney for real feedback of how the law and legal precedent apply to your situation.



Caveat Emptor.

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This page contains a single entry by Dan Melson published on July 4, 2007 10:00 AM.

Considering Condos, Townhomes, and PUDs was the previous entry in this blog.

Just Because Compensation for a Loan Isn't Disclosed Doesn't Mean It's Free is the next entry in this blog.

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