Divorce and Bankruptcy- What Happens Now with the House

Many times in a divorce case there is the issue of what to do with the marital home.

One party wants to keep the house and that’s fine, but the other party will remain on the mortgage because the spouse keeping the former marital home, cannot afford to re-finance it or lacks the credit to qualify. That is a major problem.

Assuming everyone involved has the best intentions, fact is even when you sign a marital settlement agreement that states you will not be held liable for the expenses related to the house, the reality is, it just doesn’t work that way.

When you bought the marital home, you entered into a contract with the bank that you and your spouse were both liable for the mortgage. A divorce cannot and will not alter the terms of that contract unless the original mortgage is replaced with a new one.

Thus, I have to advise clients that because they are already “on the hook” for one mortgage, it is very possible a bank will not provide a mortgage on a separate property.

While you can show the bank the marital settlement agreement, unless you are making a substantial deposit, make a substantial salary and have excellent credit, it is very likely the bank will reject your loan application.

This, not even factoring the reality that nowadays lending standards are far more restrictive than it was a decade ago.

But, let’s suppose you don’t get that loan and now ten years later, your former spouse loses his/her job, the former marital home goes into foreclosure, and now he/she files for bankruptcy. Guess who will get sued now?

That’s right. Your spouse is no longer liable for the debt associated with the mortgage, but, since you are on the mortgage, you are liable.

The bank will sell your former house at a foreclosure auction. Let say the house sells for $150,000, but the outstanding mortgage is $200,000. You now owe $50,000.

What if you don’t qualify for a Chapter 7 bankruptcy? You are now stuck in a Chapter 13 bankruptcy, paying back that $50,000, plus whatever else, for the next 36 to 60 months.

This is no different when I have clients whether parents, family, friends or relatives say they signed as a co-borrower on a student loan, credit card, or car loan. You are still liable for that debt, regardless of the fact that you were just trying to help out.

Have questions regarding a divorce or bankruptcy? Then contact attorney Alex Hernandez.

Attorney Alex Hernandez

Representing clients in the areas of Chapter 7 Bankruptcy, Family Law/Divorce, and car and motorcycle accidents for 20 years. (904) 712-5565 or (305)-688-LAWS (5297). *Se Habla Español

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