Home Equity Lines of Credit (HELOC) in Divorce

How HELOCs Complicate Divorce

A Home Equity Line of Credit, or HELOC, adds a layer of complexity to divorce property division that many couples do not anticipate. Unlike a traditional mortgage, a HELOC is a revolving line of credit secured by your home. Its flexible nature means that the balance can change, the terms can vary, and responsibility for the debt must be carefully addressed in your divorce settlement.

What Is a HELOC?

A HELOC works similarly to a credit card, but it is secured by your home. You are approved for a maximum credit limit based on your home's equity, and you can borrow and repay funds as needed during the draw period, which typically lasts 5 to 10 years. After the draw period ends, you enter the repayment period, during which you can no longer borrow and must repay the outstanding balance.

Because a HELOC is secured by your home, defaulting on the payments can lead to foreclosure, regardless of what your divorce decree says about who is responsible for the debt.

Determining the HELOC Balance for Division

One of the challenges with HELOCs in divorce is that the balance may fluctuate. You need to determine the balance at the relevant date for property division, which varies by state. Some states use the date of separation, while others use the date of filing or the date of trial.

Additionally, you should investigate whether any HELOC draws were made after the date of separation. In many jurisdictions, debts incurred after separation are the responsibility of the spouse who incurred them. If one spouse drew on the HELOC after separation for personal expenses, that portion may not be considered a joint debt.

Options for Handling the HELOC

There are several approaches to dealing with a HELOC in divorce:

Pay Off the HELOC

The simplest solution is to pay off the HELOC balance entirely, either from joint savings, from the proceeds of selling the home, or as part of the overall property division. Paying off the HELOC eliminates the debt and the associated lien on the property.

Refinance the HELOC

If one spouse is keeping the home, they can refinance the first mortgage and the HELOC into a single new mortgage in their name only. This removes the other spouse from both the mortgage and the HELOC and consolidates the debts.

Assign Responsibility

The divorce decree can assign responsibility for the HELOC to one spouse. However, this does not change the legal liability with the lender. If both names are on the HELOC, both spouses remain liable even if the divorce decree assigns the debt to one party. The only way to truly remove a spouse from a HELOC is to pay it off or refinance it.

Freeze the Account

As an immediate step, consider requesting that the lender freeze the HELOC to prevent either party from making additional draws. This protects both spouses from the other increasing the shared debt during the divorce process.

How HELOCs Affect Home Equity Calculations

The HELOC balance must be factored into your home equity calculation. Your net equity equals the home's market value minus the first mortgage balance minus the HELOC balance. For example, if your home is worth $400,000, you owe $200,000 on the first mortgage, and the HELOC balance is $50,000, your net equity is $150,000.

This reduced equity figure is what gets divided between the spouses, not the gross equity before the HELOC.

Protecting Yourself

If you have a HELOC as part of your marital assets, take these protective steps immediately. Review your HELOC statements to understand the current balance and recent activity. Request a freeze on the account to prevent additional draws. Document the balance at the date of separation. Determine whether any post-separation draws were made and by whom. Include specific HELOC provisions in your divorce agreement.

Tax Implications

Interest paid on a HELOC may be tax-deductible if the funds were used to buy, build, or substantially improve the home securing the line of credit. However, HELOC interest used for other purposes, such as debt consolidation or personal expenses, is generally not deductible. The Tax Cuts and Jobs Act placed additional restrictions on HELOC interest deductibility, so consult with a tax professional about your specific situation.

Get Professional Guidance

HELOCs in divorce require careful attention to protect both parties' financial interests. Work with your attorney, financial advisor, and real estate professional to ensure your HELOC is properly addressed in your divorce settlement.

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