Home Equity Lines of Credit and Divorce
Any time you have a marital home involved, it is important to identify any lines of credit attached to the home. Many times when you ask your clients what the mortgage balances are on the home – they may have forgotten about an open equity line because there is no outstanding balance on it.
Don’t stop with just obtaining a legal description on the property. Careful attorneys will not limit their inquiry to the legal description of the property. Instead, they will pursue actual evidence of ownership and encumbrances, including liens, by ordering a title commitment from a title company.
If you find that there is an open equity line on the property and if there is a balance on it – note that simply paying off the HELOC does NOT close the line of credit. A letter requesting that the line of credit be closed is required. If left opened even though it is paid off, both parties are liable for any future balance and either party can use the line of credit.
In First American Title Insurance Company vs. TCF Bank, the appellate court held that the payment of a line of credit loan by the title company in full did not close the line of credit, because the demand must come from the borrower or the credit line is not cancelled. In this case, First American Title Insurance Company paid off the balance of an open HELOC; however, did not request the line of credit be closed with TCF Bank. Afterwards, the line of credit was used by the vacating party and First American Title was held liable for the amount drawn on the unclosed line of credit.
When freezing a line of credit, obtain a letter signed by each of the mortgagors requesting that the line of credit be frozen, and request a written acknowledgement from the lender of the bank. When one spouse is retaining the marital home and an open line of credit is overlooked during the divorce process, there could be detrimental effects on the spouse who retained the home. Any future use of the line of credit, divorced or not, is a lien against the property and must be paid.