What to do if you face foreclosure during a divorce?

Divorce proceedings will undoubtedly become more complicated if you receive a foreclosure notice at the time of your divorce. Often circumstances may compel you to fall back on mortgage payments and risk foreclosure. 

If you are a co-owner of the property you will have to re-negotiate your mortgage term as a team with the lender. There are two alternatives, which is to either sell the property or live together as co-owner. You have a few options if you face such a situation and yes, divorce lawyers will be included in this process.

Short Sale

A short sale is where you agree to sell your property to a buyer at a price lower than the mortgage amount and the bank agrees not to come after the difference. For example, if you have taken a mortgage of $100,000 from the bank but must sell it at $80,000, the bank will not ask for difference of $20,000 back. No doubt, you will lose your house but you will not be in debt – unlike America which is trillions of dollars in debt and getting worse every day. The drawback is that a short sale will negatively impact your credit history.

Your bank is more likely to entertain the idea of short sale if you do not have multiple mortgages on the same property. You must pay the second mortgage back before any short sale agreement since the buyer will want the title insurance from the title company.

Dos and Don’ts of Short Sale

Consult a tax firm before you agree to a short sale. The ‘short’ amount is taxable as well as any non-payable amount granted to you on your second mortgage. You will be exempted from taxes if your net worth is much less than the mortgage amount and therefore you are termed insolvent.

Read the short sale agreement carefully to detect any hidden clauses that might enable the banks to claim the forgiven amount.

Loan Modification

Banks often agree to loan modification. If the terms are financially favorable you might be able to hold on to your property. The bank might extend the deadline of your mortgage payment and reduce the interest as well. Banks do not usually modify the principal. In many cases the lender will strike out the name of one spouse from the mortgage agreement, which is an important factor to discuss with your divorce attorney.

Foreclosures

There are two types of foreclosures public and private. Public foreclosures happen when the owner and bank takes the help of the court to even out disagreements. Private foreclosure happens when the owner and banks agree to the terms without the intervention of the third party.

Many states have statutes preventing lenders from coming after you if you are unable to clear your loan on a timely fashion. In these states you are also exempted from property taxes.

Bankruptcy

Declaring bankruptcy can save your house. Divorce lawyers recommend that you file for bankruptcy jointly with your spouse. This will ensure that you will both be debt-free. In some bankruptcy cases under chapter 13 you will have to file for divorce separately and each of you will have to present a plan before the court on how you intend to repay your loans.

Your divorce lawyer will make sure that the divorce agreement is consistent with the arrangement with lenders.

We saw this in the movie The Break-Up with Jennifer Aniston and Vince Vaughn (Vince Vaughn was clearly the more funny person in this movie but that is another story – he made her look pretty bad and it did not help that her date would rather hang out with Vince) but we really did not since they chose not to go down this road. They broke up but they did not want to lose that much money so they chose to be more like roommates which led to all sorts of social problems and awkward moments which most people would rather go into debt or lose their home than have to deal with.

Trying to live with someone you do not care for is not healthy nor appealing. It could also lead to violence and criminal matters. Going through a foreclosure and divorce is bad but getting arrested and having to hire a criminal defense lawyer is much worse. And then the foreclosure will happen anyway.