Can I save our credit with a quickie divorce?

Question

I bought a house in 2006, at the height of the boom. Now I owe more than $100K what the home is worth, and considering walking away from my mortgage.

(I'm in California, which is a "no recourse" state; the bank can take the house and ruin my credit, but that's about it. The bank won't approve a short sale because I'm in good shape financially; I can afford the mortgage, it's just foolish of me to pay the bank $100K simply to protect my credit rating.)

But my spouse and I have perfect credit right now; it would be painful to lose that.

We're considering a temporary divorce, transferring the house to my name only. I'd abandon the mortgage, take the credit hit, and remarry my (ex-)spouse. (We're very much in love; we're considering the divorce only for financial reasons.)

The question is: would this help us avoid ruining our credit? Or would it just be a big legal hassle to no one's benefit?

Answer 1

If you're not insolvent, doing something like this is both a moral and legal hazard:

• The Tax authorities may consider the $100,000 write-down as income. So you'll potentially transform a debt to the bank to a smaller debt to the IRS and State Tax department.
• What you're proposing to do is an act of fraud. (probably a felony)
• California is a community property state, which would make this particular scheme more complicated, since you and your wife own equal amounts of the property by statute.

When you are insolvent, the tax and moral hazard issues can be a non-issue. Setting up a scenario that makes you appear to be insolvent is where the fraud comes in. If you decide to go down this road, spend a few thousand dollars on competent legal advice.

Answer 2

My advice to you? Act like responsible adults and owe up to your financial commitments.

When you bought your house and took out a loan from the bank, you made an agreement to pay it back. If you breach this agreement, you deserve to have your credit score trashed.

What do you think will happen to the $100K+ if you decide to stiff the bank? The bank will make up for its loss by increasing the mortgage rates for others that are taking out loans, so responsible borrowers get to subsidize those that shirk their responsibilities.

If you were in a true hardship situation, I would be inclined to take a different stance. But, as you've indicated, you are perfectly able to make the payments -- you just don't feel like it. Real estate fluctuates in value, just like any other asset. If a stock I bought drops in value, does the government come and bail me out? Of course not!

What I find most problematic about your plan is that not only do you wish to breach your agreement, but you are also looking for ways to conceal your breach. Please think about this.

Best of luck with your decision.

Answer 3

I think you've perhaps over-estimated what financial benefit your wife (and you) will realize from your attempting to shoulder the unfortunate credit consequences alone.

Assuming that it works as intended, she will still be married to a man with bad credit. And that means that any future purchases that involve your combined household income will also involve a review of each of your credit history.

It would be much more straightforward for the two of you to face the default jointly. It would be much faster and with less paperwork involved.

Perhaps if you curtly informed the bank that you intend to default, they would approve the short sale. That spares you the besmudged credit history as well.

You could also be looking at refinance options. If you pushed your mortgage out longer, with lower payments, then perhaps you could wait-out the housing market, until it to goes back up.

You want to save $100 grand, but you presumably don't have $100 g sitting in savings or assets. If you default on a house, then how to you intend to purchase a house in the future? Perhaps it is better to consider keeping the house you have.