An important and too often overlooked property issue in divorce involves a HELOC. What is a HELOC? It stands for Home Equity Line of Credit. If you own a home, many banks will extend lines of credit to homeowners up to the equity in the home, and will do so at an interest rate lower than a home mortgage. The rate of interest and terms of paying back the loan vary from institution to institution. Aside from the interest rate, HELOCs are attractive because they serve like a credit card and remain open for a fixed period of time, or even until the property would be sold.
If you and your spouse own a home together, it may be possible for one of you to open a HELOC without the signature of the other. Consequently, during a divorce, it is very important that you run a check on your home to see if it has an encumbrance like a HELOC and obtain all documents relating to it, as well as all the statements (HELOCs issue monthly statements like any bank account). This review will help you determine if your spouse has secretly encumbered property or otherwise liquidated some of a critical marital asset.
Why is disclosure before settling the divorce so important? First, you cannot make a fair distribution of assets and debts without knowing if one spouse has benefited by borrowing against the equity in the home. For example, if one spouse takes out a $10,000 HELOC loan, the other spouse has lost $5,000 in equity and becomes liable for $5,000 in marital debt. So, a hidden HELOC gives all the benefit to the receiving spouse and all the loss to the unknowing spouse. This is not the type of math you want. If your attorney knows of the HELOC, your attorney can make sure that your spouse alone is on the hook for its repayment and that its distribution is accounted for in the final property settlement.
The HELOC also poses another problem – the open line of credit. If you do not know about the HELOC, you will not know to close the line of credit, which means after the divorce becomes final and before the house is refinanced, the spouse who will not get the house has a window to go to the HELOC and take out a large sum of money – for which you will be jointly liable to repay.
To protect yourself, any settlement agreement should include a provision that precludes any party adding to the indebtedness of the home, a requirement that the HELOC close effective the date of the divorce, and a hold harmless provision that states the spouse who takes the HELOC is fully responsible for all repayment and any attorney fees or costs you would incur from the late loan.
A HELOC has many wonderful advantages, but can have several pitfalls in divorce. Be sure to take precautions and protect yourself.
If you have questions about HELOC and divorce, contact us – we can help.