It’s hard to image that your spouse who you have known for years would tap the equity line in your home (often referred to as a HELOC) to simply gain access to money. Well, we’ve seen this and it does happen. I know you are saying wow that is kind of sneaky.
Why would your spouse tap your equity line?
If your spouse fears that she or he will not achieve her or his desired financial outcomes from the divorce yet knew money was “available” through the HELOC then your spouse may have the right to go to the bank and fully tap it out without you even knowing it.
How does your spouse’s actions impact you?
Well, it depends. If you did not design your HELOC to require two signatures your spouse may have inadvertently just increased your liability by a handsome sum of money. This could be difficult to rectify, yet certainly not impossible, without some critical thinking how to reposition your situation.
Internal controls on a HELOC are critically important
If you have a home that is worth $750,000 with a current HELOC outstanding of $100,000 — assuming no mortgage outstanding — then the current net equity in your home would be $650,000. Yet your perceived ‘net equity’ in your home of $650,000 may only be temporary. Once your spouse takes money from the HELOC the net equity in your home drops too.
Internal control structures in a business are what keeps everything ‘in control’. Without internal controls a business could easily fall apart and quickly drift into financial ruin. For example, you may need different people to draft the check, sign the check and reconcile the checkbook. This separation of duties keeps everything in control. Without these controls in place a business can easily get into financial trouble. Similar types of controls, just different ones, need to exist in a marriage to manage the strength of your financial position.
What happens when a HELOC does not have the right internal controls?
If you have a $450,000 HELOC with an outstanding loan of $100,000 then you and your spouse may have an additional $350,000 in your HELOC available that either one of you can access without the other person knowing it.
If your spouse accesses the additional $350,000 (i.e. takes the money), you may have inadvertently increased your obligations to the bank by at least $175,000 ($350,000 divided by 2) if not by the full amount (yes, the full $350,000). Naturally this depends on how your HELOC contract is written.
Much to your surprise, and literally overnight, your HELOC would show you have no more money to access in your HELOC. In other words the full $450,000, in this example, was taken out as a loan against your primary residence. As noted above, the home you live in functions as the collateral that will payoff the loan in case anything went wrong.
If you miss a certain amount of payments you may be forced to sell your home to payoff the bank. In context to a divorce process, if you do not diligently manage these components you could end up with literally nothing. This assumes the value of your marital estate is primarily tied up in your home. Even worse, if the housing market is not strong at the present time and/or you have not built enough equity in your home you may be considered “under water”. This means you would still have more to pay the bank than the value of your home provided after it was sold.
Your credit score can be compromised for a long time
It is important to note, through your spouse’s actions, your spouse can easily destroy your credit score during this process. Imagine your liability increasing dramatically due to no fault of your own. What would that do to your ability to purchase goods or services in the open market? You will find yourself highly compromised, financially speaking. People would not allow you to take out a new credit card, lease a new car, be a co-signor on a loan for your children’s college application and the list goes on. To maintain a healthy financial life these types of details matter and are often overlooked.
It is important to gain a clear understanding how funds flow, the types of controls you have established in your HELOC, among other factors, so you can best manage the financial outcomes of your divorce.
There are financial techniques to manage your exposure to additional liability before, during and after your divorce process and to a potentially worn down credit profile too. The details are what matters and need to be analyzed carefully to help you reposition your financial life.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.