Smart Money: Divorce decree doesn't take name off mortgage

Bruce Williams is a national radio talk show host and syndicated columnist

Dear Bruce: My wife's divorce from her first marriage was final in February 1998. In the settlement, she was relieved of all financial responsibility from the home that she and her ex-husband owned. He got the house and still lives there.

When we applied for a mortgage, we discovered that the loan on that home has a negative credit reporting history. Her ex-husband has been late by 30 days more than nine times and one time over 90 days. When we contacted the mortgage company, they told us that they do not acknowledge that the divorce decree states that my wife is no longer responsible for the loan.

Further, unless the husband refinances the home in his name alone, my wife will be liable for the loan. They will continue to report the negative activity against my wife until refinancing takes place. We are at a loss as to how to proceed. Her ex-husband doesn't have the resources and credit rating to refinance. We need to include my wife's income for our mortgage, but they won't count it because of this bad report. M.D., via e-mail

Dear M.D.: Unhappily, the mortgage company is accurate in its assessment. The fact that the divorce court relieved your wife from the house responsibility does not relieve her as long as her name is on the bond. It will remain there until the house is sold or refinanced. I wish there was a better answer. Unless her ex-husband refinances the house, this will show on her record and be counted against her, and there is not one thing that can be done about it.

Dear Bruce: My husband received an inheritance from selling property that belonged to his parents. We know we will have to pay some interest in capital gains taxes. What do we do in the meantime with the money? We are in our mid-60s and still working. L.M., via e-mail

Dear L.M.: We have to be very clear here with regard to the way the money was received. If the money was received directly from his parents through an inheritance there would be no tax to be paid, up to the exclusions, which are very high ($1 million per person at this writing). On the other hand, if he inherited property and then sold it, the basis at the time of death has to be established and taxes would be calculated on anything above that number. Of course, any interest that the inheritance monies earned is fully taxable. I urge you to sit down with an accomplished accountant.

Dear Bruce: I will soon receive a settlement from a malpractice suit that was settled out of court. I have a 13-year-old son who was included in the suit, and I plan on giving him $30,000. I want to invest this money in an annuity with checks being paid to him starting at age 25, but I am at a loss on how to go about doing this. I have no idea which company would be best for this investment. Can you offer any advice on this matter? M.P., via e-mail

Dear M.P.: You said that you plan on "giving him" money, but he was included in the lawsuit. If your son was included in the suit, it's possible that the money must be invested under the stewardship of the court and at 18 the money goes to him. I'm not certain that you have the authority to keep the money from him after he turns 18. It would be quite different if you were the beneficiary of the suit, and you planned on using some of the proceeds in whatever fashion you choose.

In any case, I would be very careful with regard to annuities. While there are certain circumstances where annuities can be valuable, more often than not there are better ways to invest. They do give you a certain amount of investment flexibility and a relatively minor insurance facet. Before you make any commitments that would be difficult to undo, get competent legal and investment advice.

Dear Bruce: I filed Chapter 7 bankruptcy in 2000. A couple of weeks ago, I was involved in a rear end collision. My insurance settled with the other driver, but the amount was not enough for a decent car. I was able to get financing for the remainder, which was $3,500, but it was at a staggering 20 percent interest. My father said he would lend me the money interest free, and I could pay him back instead. My question is, will it help my credit to pay back the loan early, in cash? Should I just pay the loan with this high interest rate? Jonathan, via e-mail

Dear Jonathan: Paying 20 percent on money that your dad will lend you interest-free makes no sense whatsoever. Assuming your dad can afford to underwrite this loan, do it. Paying back the loan early is not going to do much for your credit. A Chapter 7 filing in 2000 is going to take awhile to overcome.

In the meantime, if you do not have any credit cards, a collateralized credit card might be one way of re-establishing credit, but understand that you only get one bite at that apple. If you fall behind, they will immediately take your deposit and apply it toward your account. There is no question that there is life after bankruptcy, but as you are learning, it is a difficult road. This is why I caution folks against filing for bankruptcy until they have thought it out very carefully.