By: Lindsey O'Neill, Esq.
Divorcing couples these days are increasingly finding themselves in the foreclosure spiral....
When couples divorce, sometimes the marital home is sold and both spouses go their separate ways. Other times, one spouse remains in the home and the property is transferred solely into that spouse’s name. In these cases, the divorce decree often requires not only title to be transferred into one spouses name, but also any joint mortgage to be paid-off or refinanced. Unfortunately, though, divorcing spouses don’t always abide by the divorce decree.
Consider this common scenario: As part of Mathew and Abby’s divorce decree, Mathew keeps the house and is required to refinance the joint mortgage on the house to release Abby from further financial responsibility. While title on the deed to the property is easily transferred into Mathew’s name, Mathew does not refinance the loan. (Whether because Mathew doesn’t qualify for the loan individually or otherwise.)
Add another very common layer of complexity – Mathew doesn’t pay the mortgage payments. (There are a variety of reasons the mortgage often doesn’t get paid, particularly in these economic times, which we won’t discuss here.) What happens when a spouse doesn’t pay off or refinance the loan… and, worse, stops making payments? Divorced couples often find themselves back dealing with each other in the foreclosure spiral.
When Mathew stops paying the mortgage, the creditors will pursue Abby for payment. Abby can plead with the bank as much as she wants and even send them copies of the divorce decree showing Mathew is responsible for the debt. However, in general, mortgage companies and other joint creditors are not bound by a divorce decree. Only the parties to the divorce are bound. If the debts don’t get paid, Abby’s credit will be negatively affected.
So what do you do?
Refinance the Mortgage: If one spouse fails to abide by a divorce decree regarding refinancing the marital home, then the other spouse may be able to enforce the divorce decree by suing for contempt of the court’s order. The attorneys, and judge, can then assist in working out a plan. Creditors may be reluctant to refinance a joint-mortgage into one spouses’ name individually if that spouse doesn’t quality for the loan terms.
Sell the Home: Selling the home is an option, but in difficult housing markets, then the selling price may not cover the mortgage. In that case, the couple will need to make arrangements about the financial responsibility for any remaining mortgage balance. Sometimes, the lender will accept a “short sale” – or less money to pay off the mortgage than what is owed.
Rent the Home: If you can’t refinance the mortgage or sell the home, consider whether the home could be rented and the rental income applied toward the mortgage.
Bankruptcy: If one spouse files for bankruptcy, the other spouse may need to consult with a bankruptcy attorney to determine how it may affect his or her individual situation. Creditors usually cannot pursue a non-filing spouse, unless he or she is legally a co-debtor on the debt.
In any of the above situations, the divorce decree may need to be revised to address the many financial implications. For example, if Abby pays the mortgage while figuring out what the next steps are, she may be entitled to reimbursement from Mathew. Also, any rental income earned on the property may need to be addressed in a revised divorce decree.
Divorce alone can be extremely difficult. If you are dealing with financial problems stemming from the divorce, contact an attorney in your area to learn more about what options are available to you.
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