Divorce and Foreclosure Prevention — Legal & Practical Considerations
Many spouses who are going through a divorce also find themselves facing a foreclosure on their home. Depending on whether one spouse wants to keep the home or neither spouse wants the home, you may have certain options to prevent the foreclosure. As a preliminary matter, you will need to determine whether one or both spouses are responsible for the mortgage and the promissory note attached to the property.
If only one spouse signed the mortgage and the promissory note, they would be the only person responsible for the associated debt after a divorce. The other spouse would be free from collections efforts by the lender if a foreclosure results in a deficiency judgment. However, if both spouses signed the note, each of them would be liable for a deficiency judgment and could be pursued by the lender.
When One Spouse Wants the Home
A spouse who wants to keep the property should take responsibility for keeping up with the monthly mortgage payments, and the other spouse should be released from their liability under the mortgage. There are two main options in these cases. Either the spouse who wants to keep the home can assume the mortgage, or this spouse can refinance the loan in a way that leaves only their name on it. If you take neither of these steps, and the spouse who keeps the home stops making payments under the mortgage, both spouses might face a foreclosure after the divorce. This could harm the credit of both spouses and leave both of them liable for any deficiency judgment.
If you are considering assuming the mortgage, however, you should be aware that you may not be able to take this step if the mortgage contains a due-on-sale clause. This requires the entire balance of the loan to be paid back when the property is sold or conveyed. The Garn-St. Germain Act, a federal law, preempts the application of due-on-sale clauses in property transfers related to a divorce or legal separation in most states. However, certain states passed their own restrictions on due-on-sale clauses within the time period provided by the Act. If you live in one of these states, your mortgage will be governed by state law rather than federal law.
Refinancing sometimes can be a simpler alternative. A property settlement in a divorce may stipulate that the spouse who keeps the home will refinance the loan in their name and release the other spouse from the debt. This works only if the spouse who keeps the home has sufficient credit strength and financial resources to get a new loan.
When Neither Spouse Wants the Home
You still should try to avoid foreclosure if you do not want to keep the home. The spouses might be able to sell the home to pay off the loan, or they might be able to agree on a short sale with the lender. The spouses also might consider renting the home and using the income received from rent to pay off the mortgage. In other cases, the lender might accept a deed in lieu of foreclosure to gain title to the property. To make sure that you understand all of your options in this complex situation, you should consult an attorney who is experienced in issues related to divorce and foreclosure.
