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Is My Sister Responsible for an Old HELOC With a Dead Ex-Husband?

Question:

Dear Steve,

My sister has been divorced for approximately seven years and left the marital home approximately eight years ago.

A home equity loan was taken out right before she separated, but in the divorce decree, it was stated that her ex-husband was responsible for the loan because he kept the house.

A couple of years go by, and her ex-husband dies and leaves his house for his adult children.

They moved into the home and defaulted on the home equity loan. Unfortunately, my sister was never notified of any default and is now being sued by the bank for the unpaid balance of the home equity loan.

Is my sister responsible for paying for a home equity loan on the house she does not live in and does not own, and her divorce decree states that her ex-husband would be solely responsible for that debt in its entirety?

Darlene

Answer:

Dear Darlene,

This is an interesting situation. The first issue is the misinformation about what happens to debts in a divorce.

The divorce decree is an agreement between the parties on how they will deal with the debts. However, that does not change the contractual responsibilities of the original loan agreement.

If your sister and ex-husband were co-borrowers of the original loan, they remained jointly obligated for the loan, despite how they agreed to handle it in their divorce.

People divorce their spouses, not their creditors.

One fact I’d check on is if they took out an insurance policy on the loan. Sometimes they were sold as an additional product by the lender. If it does exist, it might pay off the HELOC. I’ve seen it happen before.

I’m stuck on the transfer of the property. Something does not feel right here. When the kids inherited the property, they might not have received a clear title to the home if the lien still is recorded against the property.

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Typically, “If the home equity loan defaults, the institution that holds the loan will foreclose on the home that you’ve inherited. This is why it’s very important to do everything you can to keep the loan in good standing or pay it off.” – Source

I’m curious how the property was transferred, or are they just living in it? If the HELOC is still recorded against the property, they could lose the home to foreclosure if the lender decides to do that.

The more I think about this issue and research it, I’m convinced the pieces don’t add up here, and there is more to the story.

I would urge your sister to attack this in two stages. The first would be to speak to a real estate attorney that is licensed to practice law in the state where the property is located to understand what actually happened with it was inherited.

We must clarify what happened with the property when the ex-husband passed away.

That will help inform us how the lender is treating the loan. If the HELOC was stripped from the title, it would become an unsecured loan. In that case, there are ways of dealing with it.

It is critical first to know the legal status of the actual HELOC before we rush to deal with paying it or eliminating it.

Sincerely,


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3 thoughts on “Is My Sister Responsible for an Old HELOC With a Dead Ex-Husband?”

  1. I agree with Steve but here are some more comments. I guess my first question is if the sister is retired on Social Security and pension. I ask because she says there were adult children from the ex that moved into the home. If that is the case all this is moot as her income is protected and she is likely otherwise judgment proof. She could choose to do nothing. She doesn’t have an interest in the home. It is not uncommon for a HELOC to not foreclose but to instead just sue on the debt- especially if a Credit Union. They would have to pay off a big first if they foreclosed. The kids could have just moved in continued to make the payments or perhaps father made them joint tenants or deeded the home to them before death. Banks don’t seem to care if people are added to the deed as long as they are getting payments. I wouldn’t be surprised if the kids defaulted on the first mortgage as well. In which event the first would foreclose and unlikely a HELOC lender would pay off a first to protect its position therefore giving the HELOC reason to sue the surviving borrower. I have a suspicion that the sister is in an exempt status anyway. Eric HELPS

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