Dealing with Foreclosure During Divorce

Who is responsible for the mortgage? Who, if anyone, will keep the home?

By , J.D. · UCLA School of Law

A couple going through a foreclosure at the same time they're going through a divorce should consider a number of issues that might come up during the simultaneous processes, including: Who's responsible for the mortgage debt? How will the debt be repaid? What will happen to the house?

Who Is Responsible for the Mortgage Debt?

A divorcing couple in foreclosure must first figure out whether the debt is the responsibility of a single spouse or both spouses. Did just one spouse sign the mortgage loan documents? Or did both spouses sign?

Signing a promissory note and mortgage has important legal and financial ramifications.

What Is the Difference Between a Promissory Note and a Mortgage?

A promissory note is basically an IOU that contains the promise to repay the loan, as well as the terms for repayment. The mortgage provides security for the loan that is evidenced by a promissory note.

What Happens If Only One Spouse Signs These Documents

When only one of the spouses signed the note and mortgage, that spouse is wholly responsible for repaying the loan. So, if a foreclosure happens, the spouse who signed the documents will suffer a drop in credit rating, but the other spouse's credit score won't be affected at all.

If a deficiency remains after the foreclosure sale—and state law allows lenders to sue borrowers to recover the deficiency—the lender can only go after the spouse named in the promissory note, which is the document that created the promise to pay.

More often than not, both spouses will have co-signed the loan documents and will both be liable for the mortgage debt.

Can One Spouse Assume the Mortgage?

If one spouse wants to keep the house after a divorce, that spouse can assume the entire mortgage loan, even if the other spouse is the only signer on the mortgage or both spouses are co-signers on the mortgage. This is true as long as the mortgage doesn't have language that specifically forbids an assumption. (See "Is There a Due-on-Sale Clause?" below.)

Is There a Due-on-Sale Clause?

While most home mortgages don't specifically forbid borrowers from assigning their rights and obligations under the mortgage to a third party, most of them do include something called a "due-on-sale clause." This type of clause states that if the property is sold or conveyed, then the entire loan balance will be accelerated (become due). Most mortgages contain a due on sale clause.

Generally, the due-on-sale clause is the only tool lenders have to prohibit borrowers from transferring the mortgage or the property. If the mortgage doesn't have a due-on-sale clause, one spouse can legally transfer title to the property and the mortgage to the other spouse without the lender's consent.

What To Do If the Mortgage Has a Due-On-Sale Clause

Even if the mortgage has a due-on-sale clause, one spouse can usually still assign the property and the mortgage entirely to the other spouse without the lender's consent because of a law called the 1982 Garn-St. Germain Act.

Under this federal law, lenders may not enforce an otherwise valid due-on-sale clause if a mortgage or property is transferred as a result of a divorce decree, legal separation agreement, or a property settlement agreement. (12 U.S.C. § 1701j-3(d)). The lender can't require any new underwriting, nor can it prohibit the mortgage transfer just because the mortgage is in default.

The spouse that wants to keep the house and assume the mortgage after the divorce should contact the lender's assumption department rather than the loss mitigation department. The lender may ask for a copy of the divorce decree or a quitclaim deed from one spouse to the other.

How to Avoid Foreclosure After Divorce

Once the parties to a divorce decide what to do with the house and mortgage—whether one spouse wants to become the sole owner or neither spouse wants to take ownership—a number of options are likely available to avoid foreclosure. If neither spouse wants the house any longer, they can attempt a short sale or deed in lieu of foreclosure.

If one spouse will take over the property and the mortgage, that spouse can then apply solely for a modification or refinance.

When to Seek Counsel

If you're dealing with foreclosure during a divorce and are having a difficult time reaching an agreement with your spouse about what to do with the home, seek the assistance of a qualified attorney who can inform you about which options are available and can facilitate arrangements to divest or retain the property.

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