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Divorce LiensIn one sense, a divorce lien is nothing new. It's simply a note payable from the spouse who keeps the major asset (usually the wife who keeps the house) to the spouse who gives it up (usually the husband), secured by a mortgage on the asset. If you're using a divorce lien to allow one of you to stay in the house(and let's assume it's the wife), here's how it would work: The husband would deliver to the wife a deed to the house, conveying his share of the ownership. At the same time, the wife would sign a note to the husband agreeing to make periodic payments and/or to pay a sum certain at some point in the future. The wife would also sign a mortgage, called a "deed of trust" in some states. The mortgage would pledge the wife's interest in the house to back up her promise to pay as provided in the promissory note. This is usually a second mortgage, because the first mortgage stays in effect throughout this transaction. The wife gets to stay in the house and keep a familiar environment for the children. The husband gets security that, eventually, he will be compensated for the equity he has given up in the house. The divorce lien doesn't work for everybody. Here are the elements that must be in place to make a divorce lien a viable option for the two of you:
If you and your spouse agree to use a divorce lien, the spouse who's giving up the house needs to make sure the note he or she gets is negotiable. This is a function of the Uniform Commercial Code (UCC), which is in effect in all 50 states. Here are the requirements for "commercial paper" (the UCC's term for the note) to be negotiable:
If the spouse's who's given up the house wants current cash, and if the note is a negotiable instrument, he or she may be able to sell the note at a discount long before the payments are due on it. For more information about how this might work, you'll want to check out Wall Street Brokers or their specific site on divorce liens at DivorceLiens.com. They're in the business of buying privately held notes, including divorce liens. Their president, Lorelei Stevens, was kind enough to take me to school on how all this works. Wall Street Brokers is conscientious about this, but others may not be. Make sure that when you sell the note, you endorse it "without recourse." Just add the words "without recourse" to your signature. What this means is that if the buyer of the note has trouble collecting on the note, the buyer won't be able to come after you for payment. If you just endorse the note and don't add the words "without recourse," you have effectively endorsed it "with recourse," meaning you stay liable for any shortfall. Probably not where you want to be. Here are the ways to get the best price for your note when you sell it:
You and your spouse will probably both need to get title insurance, so each of you can know that your respective title to the house is clear. Also, make sure the property insurance includes the spouse holding the divorce lien as an additional insured. This usually costs little or nothing. The divorce lien could work when the asset is a family business instead of a house. The one difficulty that exists here is that the security interest in a family business is more tricky and more difficult to protect. Here are some alternatives. You and your spouse can choose one or more of them, depending on your situation:
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