Clouds on Title in Divorce – Can Judgments Hold Up Closing?

Clouds on Title in Divorce – Can Judgments Hold Up Closing and How Does a Divorced Party Gain Control Over the Property’s Potential Sale?

Here’s the case and the question.

Husband and wife are divorcing. Wife will stay in jointly owned marital residence. Husband does not require a buyout immediately but desires to retain ownership interest and receive a portion of the net proceeds at time of sale in the future (presumably within a few years). But, husband has a judgment against him – actually, against the LLC which he started – from a failed business venture. It is still possible that the creditor could come against him personally and file judgment. In any case, it is highly likely that such judgment will show up in a name search by a title company. Could it cause a problem since wife will be divorced at the time of any refinance or sale transaction? How does wife protect herself as well as gain control over the sale of the property?

Short answer:
Husband’s judgment is something about which to be concerned. It would create a “cloud” on title which may or may not be overcome at time of property’s sale or refinance.

Fuller Explanation:
Husband’s judgement would cloud title until about 12 months after he conveys his interest to ex-wife (by way of Special Warranty Deed or, maybe, SWD w/Owelty).

If wife refinances soon after final divorce and seeks to finance that Owelty interest to ex-husband, the title company will do a name search on everyone in title (which would include husband and wife) and anyone who had conveyed interest in the past 12 months at least. Bam – the judgement shows up and “clouds” title. The issue must be resolved. It can at least delay or, maybe even, entirely prevent closing. No one knows until the specifics of that judgment or known and resolved.

If there is no conveyancing and they retain joint ownership, the title company will do a name search. Obviously, ex-husband would show up as “in title” and all judgments against him would have to be resolved.

The only time they would not do a name search is if 12 months have passed since the conveyancing and there is no outstanding Owelty interest to ex-husband. (It’s possible that even if there is an outstanding Owelty interest to husband, after 12 months, the title company would not do a name search – but I would not count on that). Just assume that 12 months after an UNENCUMBERED conveyancing, the title company would not likely perform a name search on the ex-husband.

So, here’s what happens in a name search. The judgment would show up. There is a presumption that it is community debt unless it can be proven otherwise. Proving otherwise is one way around it or one way for it not to hold up closing (by sale or refinancing). The other way is the standard procedure of contacting the creditor and asking for release or clarification; if the creditor does not respond within 30 days, the title company considers the judgment invalid (at least insofar as their title insurance coverage is concerned – they would not require payment of said judgment). Again, one would not want to count on such a result unless one knew that the creditor’s filing of judgment was invalid or that the creditor was no longer in business or something similar.

I have two recommendations:

1. If Wife thinks that there is ANY chance that she will keep the house long term and would, therefore, wish to perform a buyout to her ex-husband, she should apply to me immediately and allow us to resolve this title issue BEFORE final divorce so that there is no question as to any “clouds” on title. That’s the whole genius of what we do – we just do all the mortgage and title stuff BEFORE final divorce when such issues can be resolved more easily. No guess work after divorce. No “hope-so’s” after divorce. No wondering what might happen. The parties KNOW because the deal is essentially done.

- For example, it’s possible that the decree could “confirm the judgment as husband’s separate debt” similar to confirming some property as separate. But this is no guarantee and the title underwriter would have to see the actual judgment and make a decision on it. Again – get the loan underwritten BEFORE final divorce so that such matters can be resolved.

2. Almost certainly, wife should have husband’s interest conveyed to her at time of divorce…even if it is encumbered with an Owelty lien. This is how she gains control over the transacting of that property. As long as husband has not conveyed interest, he is an owner and would have to agree to terms of sale, contract, etc. That’s rarely a good idea for two divorced parties to remain, effectively, in business together as joint owners of a property. Even if the decree specifies that wife alone can agree to the terms of sale, ex-husband still has to show up and sign the warranty deed. So, if he doesn’t like the terms, he can just delay and obfuscate and carry on until months later when some court might force him to sign???? Good luck with that.

Thanks to Billye Souder ([email protected]) of Trinity Title for expert help in answering this question.

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