An unexpected foreclosure lawsuit with a former spouse can make a disconcerting – and unwelcome — continuation of a divorce. This can easily happen when couples fail to properly transfer ownership of the marital home.
At the conclusion of a divorce, most former spouses imagine their day in court is over. However, former spouses can find themselves back in court in a foreclosure lawsuit on a house they no longer own with the former spouse as a co-defendant.
The collapse of the housing market has limited the options that divorcing couples have when dealing with the marital home, which is often “the greatest asset and the greatest liability at stake in a divorce,” according to Atty. Steven D. Kramer, who was included in Florida’s Best Lawyers and in the Best Lawyers in America.
In some parts of the country, many houses are still underwater, so divorcing spouses cannot simply sell the home, because they would owe money at the closing, and they also are finding it is very difficult to refinance an underwater property. Normally, dealing with the marital home is much easier because the divorcing couple either sells the home and divides the profits, when the property has equity, or they may refinance the home and remove the other spouse from the note and mortgage.
Sometimes one spouse quit claims his or her interest in the marital house to the other spouse. In a quit claim deed in a divorce, one spouse terminates any interest in the jointly owned marital home, thereby granting the receiving spouse full rights to the property. For example, when a husband acquires the marital home in a divorce settlement, the wife could execute a quitclaim deed eliminating her interest in the property and transferring full claim to the husband quickly and inexpensively.
“Perhaps out of wishful thinking, denial, or simply bad legal advice, many people hope that by executing a quitclaim deed and surrendering ownership in the home to their spouse, they will be relieved from liability,” writes Kramer. The lender can still sue for foreclosure, because it is not bound by the terms and conditions of the settlement, specifically whose name is on the deed. The lender attempts to collect money by filing foreclosure and forcing the sale of the home at auction. Moreover, after the auction, the bank lender may pursue borrowers for a deficiency judgment– the difference between the amount of the loan and the value of the home. Because the bank can pursue anyone obligated by the note, “unsuspecting individuals often find themselves facing foreclosure after divorce on a home they neither live in, nor own,” writes Kramer.
Many divorce settlements require the spouse receiving the property to refinance the property in his or her name alone, which protects the selling spouse from future liability. Very often, refinancing a mortgage cannot be done for a variety of reasons, including the home being underwater or a party’s bad credit.
When dealing with an upside down property, couples should examine other options. One option is loss mitigation like a deed-in-lieu of foreclosure, where the bank accepts a deed in lieu of foreclosure and releases the parties from some or all liability, or a short sale, where the lender generally accepts less than what is owed on the property. Property owners should never close on a short sale without understanding their liability to the bank following the sale. In the event that the bank pursues a foreclosure on the property, another avenue is a consent judgment. In a consent judgment, the bank releases the parties from liability and obtains an in rem judgment, which is a judgment against the property itself rather than the borrowers.
The parties should consider potential tax liability relating to any debt forgiveness by the bank.