Many of my clients are facing foreclosure as a result of their divorce because they either don’t want to or can’t afford to make the payments. In the old days, they could list the property for sale and walk away with their share of the equity. In today’s housing market, their mortgage often exceeds the market value of their property. The prospect of having to come up with large sum of cash just to get out is frightening.
Does this ring true for you? If so, you might ask…what options do I have? Let me suggest a few:
1. One spouse takes over. One spouse gets the title and refinances the joint-mortgage to release the other spouse from further financial responsibility. Unfortunately, lenders are reluctant to refinance a joint-mortgage into one spouse’s name if he/she doesn’t qualify on his/her own. If the refinancing effort fails, then the other spouse remains on the hook (may be able to sue to enforce the divorce decree).
2. Business partnership. The couple keeps joint title and mortgage as is and tries refinancing or loan modification to reduce payment if necessary. One spouse lives in the property and pays a large portion of the mortgage while the other spouse contributes the remainder. Once the market rebounds, the property is then sold and the profit is split up. The issue here is the lack of finality for the divorce as both parties remains liable for the other’s actions for an unknown duration.
3. Renting to buy time. Both joint title and mortgage remains as is. As before, they try refinancing or loan modification to reduce payment if necessary. Then, rent out the property and apply rental income toward the mortgage. Make sure that you are not violating the mortgage by converting it into a rental and you meet the rental licensing requirements. The pros and cons in the second scenario apply here as well, with the added responsibility of being a landlord.
4. Pursue a short sale. If successfully done, a short sale allows homeowners with financial hardship (such as a divorce) to sell their property for less than what they owe, satisfy their mortgage, possibly eliminate deficiency judgment, and minimize credit damage, without paying realtor commissions. You’ll need to consult an accountant to understand potential tax liabilities as a result of debt cancellation. The issue here is that 90 percent of short sales fail nationally because most agents are completely unaware of what the lenders want. Choosing a competent professional is the key to this option.
5. Let it foreclose. Allow the property go into foreclosure and remain in the home for as long as possible and pocket the mortgage payments for the duration. The issue here is that the homeowners remain liable for the deficiency amount as a result of the foreclosure sale. For example, if you owe $150K and the property sold for $100K at the foreclosure sale, then you will remain liable for the short fall of $50K plus all legal fees involved. In some states, the lender has the right to garnish wages to recover the shortage. Not to mention that a foreclosure has the most devastating effect to a person’s credit rating and has the potential to hamper future employment opportunities.
6. File bankruptcy. Look into Bankruptcy and consult competent legal advice. In general, bankruptcy has devastating effect to a person’s credit rating. If one spouse files for bankruptcy, the other spouse may be affected. However, bankruptcy is worth pursuing under certain circumstances. For example, Chapter 13 lien stripping can potentially eliminate second and third mortgages on the property and Chapter 7 bankruptcy can potentially shake off unsecured debt while exempting the primary residence.
To wrap up, we are all aware that foreclosure has risen dramatically since 2007. Most people are aware that 50% of all marriages in the America end in divorce. Some people are aware that 25% of all residential properties with a mortgage nationwide are now underwater. But few people are aware that 7 out of 10 homeowners go into foreclosure without visible intervention! With your financial future on the line, please explore all your options and seek competent professional help.
