Mortgages and Divorce–A Match *Not* Made In Heaven

03 Dec Mortgages and Divorce–A Match *Not* Made In Heaven

When a couple divorces, what happens to the mortgage?

In many divorce cases, one spouse keeps living in the family home. (We’ll call this person the “Home Spouse”). The Home Spouse wants to be listed as the sole owner of the property, while the other spouse (whom we’ll call the “Non-Home Spouse”) wants to be removed from liability for the mortgage. These are two completely separate matters.

The Non-Home Spouse wants his or her name off the mortgage for several reasons. First, if the Home Spouse makes late payments or defaults on the mortgage, so long as the Non-Home Spouse is on the mortgage, the Non-Home Spouse’s credit will be damaged. Second, the as long as the Non-Home Spouse is on the mortgage, it is still considered a debt—and a significant debt—for the purposes of the Non-Home Spouse’s credit rating. This means that the Non-Home Spouse might not be able to qualify for their own mortgage because of the substantial debt they’re still legally liable on with the Home Spouse. Finally, the Non-Home Spouse may simply want to eliminate all financial entanglements with the Home Spouse.

It is very simple to change the ownership of real estate in these circumstances. Both spouses sign a Quitclaim Deed transferring property to the Home Spouse. While this removes the Non-Home Spouse from the Deed, it has absolutely no effect on his or her continued liability for the mortgage.

Mortgages aren’t so simple.

While a Quitclaim Deed is a transaction involving only the two spouses, a mortgage adds a third party: the mortgage company. Normally, mortgage companies want as many people as possible liable on the mortgage. This way, if there is a default, there is a higher likelihood that there will be somebody who will be able to pay a deficiency judgment. Accordingly, when you ask the mortgage company to remove the spouse who isn’t living in the house from liability, it is likely to flatly answer, “No.”

The solution has generally been for the Home Spouse to refinance in his or her individual name and pay off the joint mortgage company, which releases the Non-Home Spouse from liability. Unfortunately, in today’s mortgage and housing market, this may be impossible. The house may have gone down in value, meaning that there simply isn’t enough equity to support a refinance. And given the tight money markets, a refinance may simply be unavailable.

As a result, the spouses may have to sell the house, or, if the value has dropped enough, they may even be forced into bankruptcy because of the excess liability for the unpaid portion of the mortgage.

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Brett Weiss, a senior partner at The Weiss Law Group, LLC, represents people and businesses in all phases of bankruptcy. He has experience in complex individual Chapter 7, Chapter 11, and Chapter 13 bankruptcy cases, and in Chapter 11 small business restructuring and reorganization. Mr. Weiss lectures nationally on bankruptcy issues. He has testified before the Federal Bankruptcy Rules Committee, the Consumer Financial Protection Bureau, and has twice testified before Congress on bankruptcy and credit issues. Brett Weiss is the co-author of Chapter 11 for Individual Debtors, and has written Not Dead Yet: Bankruptcy After BAPCPA, for the Maryland Bar Journal, as well as hundreds of blogs for the Bankruptcy Law Network. With his colleague, Daniel Press, he recorded a 13-hour basic bankruptcy training series, and leads intensive three-day Chapter 11 training boot camps. Mr. Weiss has received international media attention in connection with his work. He was interviewed by Barbara Walters on The View, has appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, National Public Radio, AARP-TV, the BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. Brett Weiss is the previous Maryland State Chair for the National Association of Consumer Bankruptcy Attorneys, a founding member of the Bankruptcy Law Network, on the board of the Maryland State Bar Consumer Bankruptcy Council, and a member of the American Bankruptcy Institute and the Bankruptcy Bar Association of Maryland. He has received the Distinguished Service Award from the National Association of Consumer Bankruptcy Attorneys for his work on behalf of consumers across the country. Mr. Weiss is admitted to practice before Maryland and District of Columbia federal and state courts, the United States Courts of Appeals for the DC, Fourth and Eighth Circuits, the United States Tax Court, and the Supreme Court of the United States, and has been practicing law since 1983.
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