A note can be sold as part of a divorce, because cash divides cleanly and a shared stream of payments keeps two people tied together. The sale normally needs both spouses to agree, and in some cases the court as well. Get the note priced early, and close only when your attorneys say you can.
Why a note is hard to divide
A house can be sold and the proceeds split, and a savings account can be halved. A note is a contract with a third person, the payer, who owes one payment a month to whoever holds it. Dividing it means one of the following:
- Both of you stay on the note as co-owners and divide each payment for years.
- One of you takes the note and the other takes something of equal value.
- The note is sold and you divide the money.
Each of these works, though for very different couples.
How the routes compare
| Stay co-owners | One spouse keeps it | Sell and split | |
|---|---|---|---|
| Money received in total | The most, if the payer keeps paying | The most, for the spouse who keeps it | Less, because of the discount |
| Ties between you afterwards | Continue for the life of the note | None | None |
| Needs a value for the note | No | Yes | The sale sets it |
| Who carries the risk of default | Both | The spouse who keeps it | The buyer |
Staying co-owners
On paper this loses nothing. In practice every decision about the note needs two signatures from two people who have just divorced. Couples who choose it can hand collection to a servicing company, which takes the payment and sends each of you your share.
One spouse keeps the note
No discount is paid on this route. The spouse who keeps the note receives every remaining payment and carries all the risk that the payer stops, and the other receives property to balance it. The hard part is agreeing what the note is worth.
Selling and splitting the cash
A buyer pays a lump sum, the note is assigned to them, and the two of you divide the proceeds as your settlement says. The cost is the discount, the gap between the balance owed and the price a buyer pays. In return you get a clean end and a figure that neither of you had to argue for.
What the note is worth for settlement purposes
A buyer pays less than the balance so that the payments give them the return they want on their money. A settlement that counts the note at its balance therefore overstates it by the size of that discount.
An example with round figures shows what is at stake. Say the payer owes $100,000 and a buyer would pay $90,000 for the note. The discount is $10,000, which is 10% of the balance. If one spouse keeps the note and it goes into the settlement at $100,000, that spouse has been credited with $10,000 more than the note would fetch today. If it goes in at $90,000, the same spouse collects every future payment on an asset that was counted at a marked-down figure. Either treatment can be defended, which is why it is a point to settle with your attorneys, and it is far easier to settle when both sides are looking at the same priced offer.
Example only, with figures chosen to keep the arithmetic simple. A real price depends on the payer’s record, the equity in the property, the lien position and the paperwork.
A written offer with its worksheet came from neither spouse, and that makes it useful even if nobody sells. The worksheet follows how note buyers calculate a price, so either attorney can check the figure line by line.
Whose note is it?
A sale has to wait on the answers to a pair of legal questions.
The first is whose name is on the note. If both of you are named as the note holder, a buyer will need both signatures. If only one of you is named, the other may still have a claim to it, depending on when and how the note was created and on your state’s rules for dividing property. Buyers are cautious about that possibility, and may ask for the other spouse’s written consent, or the final decree, even when only one name appears.
The second is whether an order limits what you can do. A court, or the state’s rules for open divorce cases, may restrict either spouse from selling or transferring assets until the case is finished, and selling a note without the agreement or approval required can cause serious trouble in the case.
If you and a former partner were never married, there is no divorce case to set the terms, and what you are doing is selling a note you hold with a co-owner.
Put both questions to your attorney before you sign anything with a buyer, since the answers turn on your state and on your facts.
The order to do things in
- Tell your attorney the note exists and that a sale is being considered.
- Gather the note, the recorded mortgage or deed of trust, and the payment record.
- Get the note priced. Either spouse can ask us to price it. Ask for a full-sale price and, if either of you wants to keep some income, whether a partial is possible.
- Share the offers with both sides, so that the price is something both attorneys have seen.
- Agree the route in writing, in the settlement agreement or by a court order if one is needed.
- Close. Both spouses sign where required, and the proceeds are paid out as the agreement directs.
Pricing can happen as early as the third step because a quote commits nobody, while closing waits until the paperwork of the divorce allows it. For the timing question by itself, see whether you can sell a note during a divorce.
Could a partial help?
Sometimes. In a partial, a buyer pays a lump sum for a fixed run of the coming payments and the note is assigned back once those are collected. One spouse can keep the note that way and still raise cash now to pay the other their share, at the price of going without the payments for the years that were sold.
It fits a divorce only when one spouse clearly ends up as sole owner, and only when the payer’s record is steady enough for a buyer to rely on those particular payments.
Tax and the settlement
Transfers between spouses as part of a divorce, and sales to an outside buyer, can be treated differently for tax. Who reports what, and when, depends on the structure of your settlement and on your circumstances. Have a CPA look at the options before the settlement is final, because it is hard to change afterwards.
The decision the attorneys need from you
Once the offers have been shared, what the attorneys need from the two of you is a choice between the columns in the table above: stay co-owners, award the note to one spouse, or sell. Divorce is seldom the only pressure. If it comes with another of the situations in which selling a note makes sense, such as a debt to clear or a payer who has begun paying late, say so, because that can change which column fits.
Related questions
Do both spouses have to sign to sell a note?
If both are named as note holders, yes. If only one is named, a buyer will often still want the other spouse's consent or the final decree, because the other spouse may have a claim under state law. Your attorney can tell you what applies.
Should the note be valued at its balance in the settlement?
Not without discussion. The balance is what the payer owes. What the note would sell for is lower. Which figure is used, and who gets the benefit of the difference, is something to agree with your attorneys using a real priced offer.
Can one spouse get a quote without the other knowing?
Anyone with the note details can ask for a price, and a quote commits nobody. A sale is different. It needs the signatures and approvals your situation requires, and a buyer will check for them before funding.