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JUDGMENT LIENS AND DIVORCE

By: John B. Newman

If husband and wife own a piece of real property jointly they hold the property as “tenants by the entirety”. If a lender obtains a judgment against one of the parties, say, the husband, the judgment lien attaches to his 50% interest in the property. However, because the property is owned in that special form of ownership called a tenancy by the entireties, the lender cannot force a sale of the husband’s interest. This is special protection for the institution of marriage and for homeownership by married persons. On the death of either of the spouses, title to the entire property vests in the survivor. If the husband dies first, then the wife would acquire title to the property free and clear of the judgment lien against her husband. On the other hand, if the wife dies first, the husband will own the entire property subject to the lien of the lender. Thus, the lender does not have a lien it can presently enforce and is left to reading the obituaries and hoping for the right death order. The lender has one other advantage, which is significant: the parties cannot sell or mortgage the property without paying the lien in full.

The big question is what happens if the parties divorce. Hypothetically, each spouse would receive 50% of the property and the lender would be paid from the husband’s 50% share. However, that is not always the case.

Courts are empowered in divorce proceedings to allocate marital assets equitably between the spouses, regardless of ownership. A court may direct the sale of the property and the distribution of the proceeds between the spouses in such proportions as it deems fair in the circumstances. A court may order one spouse to convey the property or a portion thereof or an interest therein to the other.

For example, a court could order that a wife is entitled to 70% of the net proceeds of the marital home. The courts have held that this ruling is tantamount to a conveyance to the wife of an undivided 70% interest in the real property as a tenant in common with her former husband. The courts have further held that to the extent necessary to secure that interest pending the sale, the divorce judgment created an equitable lien in the wife’s favor upon the husband’s interest in the martial home. Since a lender can acquire no greater rights than the husband had in the marital home, in our example, after the judgment of divorce is entered, the wife receives her 70% interest free and clear of the judgment lien against the husband. In some cases, a court will award 100% of the marital home to the wife. Under the reasoning above, she will take the house free and clear of the husband’s judgment lien.

The possibilities for fraud are clear. A loving couple faced with a substantial judgment against the husband could easily divorce, arrange for the allocation of the marital home to the wife in the divorce and reconcile quietly. Once the title to the property is in the wife’s name free and clear of the lender’s judgment lien, she could sell the property and dispose of the proceeds or refinance the property. There is usually a remedy for fraud but it is a long course and the proofs are difficult. Most lenders will not spend the resources to attempt to prove a fraud in this situation. Very few people are willing to go through the opprobrium and fraud to cook up a divorce to defeat a lender. That is why this scheme does not happen often. However, for the ruthless and conscious-free, it is a viable tactic to avoid the loan obligation of one spouse.

What is the lesson to be learned? The simplest lesson is that a 50% interest in a marital home should not be given great weight in evaluating a financial statement unless the spouse joins in the loan or joins in a mortgage securing the loan.

This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.