How Your Credit Score Matters During Divorce

Lawyers and litigants alike have long understood the importance of maintaining a good credit rating before, during, and after the divorce. As the parties, particularly one who has not had significant employment during the marriage know, a positive credit rating is critical to establish a new residence, purchase vehicles, and start a new, single life. Often however, the actions of one party can have the effect of damaging irreparably the credit rating of the other. This often happens in the context of one party failing to pay the mortgage on a former marital home or refinancing the mortgage to remove the other party as obligor. Recently, this issue was examined by the court in the case of LH v. DH.

In that case, the parties’ settlement agreement at the time of divorce provided that:

…it is the intent of the parties that the wife shall maintain and keep the marital home… Husband shall execute a quit claim deed transferring his interest in the former marital home to wife, and husband’s attorney shall hold the same in escrow pending wife’s refinance of the mortgage in her name. Wife will have nine months from the date of this agreement to obtain refinance of the mortgage in her name.

This is a very common provision which is found in many settlement agreements. In this case, however, the wife failed to refinance the mortgage removing the husband as an obligor. The husband did not take any action to enforce this obligation initially. However, a couple of years after the divorce, he went to purchase a new home of his own. When he applied for a mortgage, he discovered that his credit rating had been negatively impacted, and he was unable to obtain a favorable rate for a mortgage as a result of the fact that his name was still on the mortgage for the former marital home. He then made an application in court seeking enforcement of the settlement agreement and to appoint him as attorney-in-fact to sign any documents to list the home for sale and sell it.

The court agreed with the husband and granted his request. Importantly, however, the court’s decision took notice of the fact that “as a matter of indisputable knowledge, a positive credit rating and score is one of the most valuable and important assets a party may presently possess. Simply put, a strong credit report and score can enable one with relatively limited assets or income to make substantial purchase is which he or she could not otherwise afford…. Reciprocally, a negative credit rating and score can have a detrimental and sometimes disastrous effect on the party’s financial health, often crippling the party’s ability to obtain a loan, either at a favorable rate or at all, for significant purchases such as a house, car, school tuition, or other expensive items, will potentially and simultaneously limiting the individuals healthy financial growth for years.”

This acknowledgment by the court is very significant. As a practical matter, when an agreement provides time to a party refinance a mortgage or loan, it is important for the other party to regularly check his or her credit score. Additionally, when deadlines pass under the terms of an agreement, it may be critical to take appropriate action to enforce its provisions. While this can be sometimes emotionally difficult given the fact that former spouses and often children are living in the house, the repercussions can be devastating.

 

OG: J. W. Millner