BREAKING UP IS HARD TO DO, AND WHAT HAPPENS TO JOINTLY HELD PROPERTY?
HOW CAN A SEPARATION AGREEMENT AND DIVORCE IMPACT SETTLEMENT?
FIND OUT HERE.
Divorced couples or those in the process of divorcing can encounter title problems when they try to sell jointly-owned property. The timing of the divorce and when property is transferred become critical factors. What follows below is an introduction to title issues that can arise when married couples break up and how being proactive can prevent obstacles to settlement.
What is “Tenants by the Entirety”, and what makes it special?
Property owned as Tenants by the Entirety is held only by married couples. Upon the death of one spouse, there is an automatic transfer of property interest to the surviving spouse. In addition, Tenants by the Entirety provides a shield of protection around the property title from most creditors, with the exception of certain Federal liens and judgments in favor of the United States. Here’s how it works:
Let’s say Creditor Jay obtains a judgment in the Circuit Court for Frederick County for $29,000.00 against Husband Harvey for defaulting on a loan used to buy livestock. This judgment becomes an automatic lien against real property owned by Harvey in Frederick County. Wife Wanda is not on the loan and is not named in the judgment. Harvey and Wanda’s marital home is in Frederick, in which they own as Tenants by the Entirety. Since the lien is against Harvey alone, and Harvey and Wanda are married, the $29,000.00 lien will not attach to the property title. However, Harvey still remains personally liable for the debt.
Likewise, as long as Harvey and Wanda sell the property while married, they will not have to pay off the lien in order to sell the house. The incoming Buyer will not be responsible for the lien, and assuming that the title is otherwise clear, the Buyer will be able to obtain an owner’s title insurance policy. However, Harvey still remains personally liable for the debt.
Can a Separation Agreement convey property title? What if my ex-spouse waits until after the divorce is final to sign the Deed, removing himself as an owner?
Keeping in mind what we know about Tenants by the Entirety, let’s find out:
- Harvey and Wanda are divorcing.
- They have a Separation Agreement where Harvey agreed to deed the marital home to Wanda.
- Wanda’s divorce attorney specifically advised Wanda to wait until AFTER the divorce for Harvey to transfer the house to her.
- After the divorce becomes final, Harvey transfers the house to Wanda per their Agreement and Wanda becomes the sole owner.
- Wanda finds a buyer for the house and signs a Sales Contract.
- The title company receives the Contract and orders a title search. An attorney reviews the abstract records and finds 10—yes, that’s ten—judgments against Harvey alone.
- Assuming that there would be no issues with the sale of the house, Wanda moved out of the house and into a new home.
This is very bad news, and is a case my law firm was involved with.
- How do the liens against Harvey affect Wanda’s ability to transfer the property to the Buyer?
- Can the Separation Agreement help?
- Does it matter that Harvey and Wanda are no longer married?
Even though Wanda is the sole owner of the house, Harvey’s liens continue to affect the property title. Why? Divorce dissolved their Tenancy by the Entirety status which permitted the liens against Harvey to attach to the property. During the time Harvey and Wanda were married, any lien that was filed against Harvey did not attach to the property because of the Tenancy by the Entirety status. Once a divorce is final, however, the parties become Tenants in Common, and lose the creditor protection that makes Tenancy by the Entirety unique. When Harvey became a Tenant in Common owner, those liens suddenly attached to his interest in the property. Thus, when Harvey transferred the property to Wanda, his interest was then subject to all of the liens.
As the Seller, Wanda has an obligation under the Sales Contract to produce clear title. In order to do this, since she is the sole owner of the property, she must coordinate the payoff of judgments against Harvey because they are now liens on the property title. These liens need to be satisfied and released by the lienholders in order for an incoming Buyer to obtain clear title, not to mention a lender who will not loan money to a Buyer when the collateral for the loan (the house) is collateral for other lienholders.
What happened in Wanda’s case?
The sale fell through. The liens could not be paid and released by the time of settlement. Wanda, having already moved out of the house, could not afford to pay the mortgage on it plus the house she bought. Wanda missed out on proceeds from the sale of the property and soon after, lost the house completely when it was foreclosed on. This is a devastating ending for Wanda, especially considering that the whole situation could have been prevented with better planning.
What Harvey and Wanda should have done:
Unfortunately, Wanda received some bad advice from her divorce attorney. Her attorney recommended that she wait until AFTER the divorce was final for Harvey to transfer the house to her. However, doing so allowed liens to attach to the property that otherwise would not have, not to mention caused an impossible situation for Wanda to resolve in a matter of weeks to sell the house. If Harvey and Wanda would have transferred the house to the Buyer together, while they were still married, the liens against Harvey would not have attached to the property by virtue of the Tenants by the Entirety protection. Their agreement that Wanda receive the house and the proceeds from the sale could have been set forth in the Separation Agreement.
An alternative option would be for Harvey to convey his ownership in the property to Wanda BEFORE their divorce was final, making Wanda the sole owner. Here, the liens against Harvey would not have attached to the property and Wanda would be able to transfer clear title to the Buyer.
Budget time for a new Deed between spouses to go on record:
If the Separation Agreement requires a transfer from one spouse to another, the sooner this is done in the process of selling the property, the better! A transfer between spouses must be recorded and go on record before the property is transferred again to a Buyer. If the Deed between spouses is not recorded early enough, the Seller-spouse could easily exceed the closing date, breach the contract, and lose the settlement.
What if an ex-spouse requests a payoff to sign a Deed that she otherwise agreed to sign per the Separation Agreement?
Let’s change the Facts:
- Harvey & Wanda divorce.
- The Separation Agreement states that Harvey receives the marital home and Wanda will deed the house to him.
- Wanda moves out.
- Wanda never transfers title by Deed to Harvey as sole owner.
- Months later, Harvey decides to sell the property and signs a Sales Contract with a Buyer.
- Harvey asks that Wanda sign and deliver a Deed transferring title to him, per the Separation Agreement. Wanda demands that Harvey pay her ten thousand dollars ($10,000.00) to do so.
This is bad news for Harvey. Our law firm was also involved with this case.
- What is the argument for Wanda’s ownership interest in the property?
- Did the promise in the Separation Agreement convey Wanda’s ownership interest?
- Does Harvey have to pay Wanda?
Wanda is still on title to the property with Harvey. Why? The Separation Agreement, in which the parties agreed that Harvey would keep the house, did not convey legal title. In order to do that, there must be an executed Deed. Moreover, the Sales Contract is not valid unless it is amended to include Wanda as a Seller.
What are Harvey’s options?
He can either pay Wanda or likely spend more money taking her to court and asking a judge to compel her to sign the Sales Contract, Deed, and all other documentation.
What happened in Harvey’s case?
Harvey had an interested Buyer and did not want to lose the Contract, so he decided to pay Wanda on the condition that she fully cooperated in signing all necessary paperwork.
What Harvey should have done:
When the Separation Agreement was signed, Harvey could have asked Wanda to sign a Deed conveying her interest in the property to Harvey, which would have been consistent with their intentions in the Agreement. This also would have left plenty of time for the Deed to get recorded and go on record before he listed the house.
Separation Agreements do not convey title to real estate. While they may contain a promise from a husband to transfer property to a wife (for example), if the promising spouse does not comply, the other spouse must either spend money to enforce the agreement in Court or negotiate with the promising spouse to sign the Deed. Timing is everything. If property is held as Tenants by the Entirety, most liens against either spouse, with some exceptions, will not attach to the property title. Preventing liens from attaching to title can also be achieved if one spouse deeds property to the other prior to divorce. A divorce severs Tenancy by the Entirety and creates a Tenancy in Common, which allows liens to attach to title. If the intent of a divorcing couple is for title to be transferred to one spouse, it may be prudent planning to have the new Deed signed in conjunction with the Separation Agreement to prevent future headaches caused by an uncooperative spouse.
Readers with questions about this or any real estate legal matter can reach Dave Parker at 301-590-9300.