Facts: Husband and Wife divorced after six years of marriage.
There was no equity in the marital residence. Both parties were listed as co-borrowers on the mortgage. The appraised value of the home was $147,100.
Several judgment liens were filed against the marital home for credit card debt and medical bills, and at the time of trial, the judgment liens totaled $43,327.74. The total recorded indebtedness against the property was $211,266.74. Thus, the home had a negative equity of $64,166.74.
The parties were able to stay current on their mortgage payments, but Husband testified that he was “working week-to-week with money” and did not have an excess.
Wife wanted the trial court to order the house sold and to order Husband to pay the deficit that would remain after the sale based on the liens and mortgage liability.
Because of the judgment liens, the trial court found there was no way for the house to be sold and the debt extinguished so as to allow closing and transfer of the deed. Neither party had the present ability to accomplish this.
The trial court decided to award the home to Husband and ordered him to indemnify and hold Wife harmless from the mortgage debt.
The trial court did not require Husband to refinance the mortgage or sell the home, finding:
There is no possible way to relieve Wife from liability on the mortgage indebtedness unless the property is allowed to go to foreclosure. Neither Husband nor Wife has the present ability to pay $60,000.00, which is the approximate amount that would be required to sell the property and satisfy the mortgage/lien indebtedness.
On Appeal: The Court of Appeals affirmed the trial court.
It is not uncommon in divorce cases to turn over the ownership of a marital asset to one party while the parties remain jointly liable for the debt associated with the asset. While it is possible to order one party to make the monthly payments on a joint debt, the court cannot absolve the other party from his or her liability to the creditor. It is also unlikely that a creditor will readily agree to release a solvent debtor simply because of a divorce. Thus, if the party who has been ordered to make the monthly payments on a joint debt defaults, the other party becomes responsible for the debt and the late charges and runs the risk of damage to his or her credit rating.
Courts and divorce lawyers have devised several ways to address this problem. The court may order, or the parties may agree, that the person awarded the property will refinance it or obtain a new loan in his or her own name and then use the proceeds to pay off the existing joint debt. The court may also order, or the parties may agree, that the property will be owned jointly until a date certain when the property must either be financed or sold. Finally, the parties or the courts may include a “hold harmless” provision in the decree or marital dissolution agreement in which the parties are required to indemnify and hold each other harmless from any and all future obligations stemming from ownership of the property they receive.
Under the circumstances, the Court of Appeals was fine with the trial court’s solution:
In the absence of any other feasible alternatives, the trial court in this case opted for the third option, ordering Husband to “indemnify and hold Wife harmless from any debt associated with the marital residence.” We recognize that neither Wife nor Husband is placed in an advantageous situation. However, as the trial judge aptly stated, “a divorce doesn’t mean a fresh start.” We cannot say that the trial court erred in its conclusion that Wife must remain a co-borrower on the mortgage due to the parties’ financial constraints.
The trial court was affirmed.
K.O.’s Comment: Fun fact—This opinion contains the first reference to “Facetiming” that I’ve seen from the Court of Appeals.
Information provided by K.O. Herston: Knoxville, Tennessee Divorce and Family Law Attorney.