How your divorce leads to foreclosure
Making the decision to get divorced is one of the toughest decisions you’ll have to face in your lifetime. Your life is being turned upside down. You broke the news to your family and friends, who were sad to hear the news. You might have been to therapy. You tried to work on your marriage, but you know it’s time to move on.
You might have been cheated on. You feel angry, betrayed, self-conscious. You don’t know how to feel now, but you know that your life will never be the same again.
Maybe you had to find another place to live. You’re worrying about really important things like taking care of your children, your health insurance coverage, and splitting up all of the property you’ve accumulated over the years.
One of those things you might have purchased with your spouse is your home. The “marital residence.” This is probably your most valuable marital asset, so when you sit down with your spouse to divvy up all your stuff, the house is probably the first thing that you iron out.
Most of the time, and especially where there are children involved, one of the spouses is going to get to keep the house and the other will leave.
Now, while many of you figure that you can work out your foreclosure problems on your own, you definitely know that you need an attorney to work out your divorce. Your divorce lawyer is going to set up an agreement with your spouse’s divorce attorney as to all of the important things. Child custody, insurance, your children’s education, and the division of property, including your home, are all going to be squared away.
When it comes to your home, the value that is going to be split is going to be the equity in the house. We discussed equity in some depth in an earlier post, but the basic calculation is that equity equals the value of the house minus what is owed on the mortgage. Whatever formula you’re using to split assets will get applied, or one spouse will “trade” the equity in the home in order to keep some other marital asset – the permutations on this are endless and unique to each situation.
The mistake that I see happen over and over when people divorce is that they don’t adequately deal with the mortgage. The divorce attorneys successfully bring their clients, who are understandably very emotional about the situation they are in, into an agreement. It’s nothing short of a miracle. They divide the assets, including the equity in the home, but they don’t deal with what happens when the “what if” actually happens.
In New York City and Long Island, which is where I live and practice, many families rely on two incomes in order to pay their mortgage and other living expenses. The days where the father went out and earned a living and the mother stayed at home to raise the children are over. Now, one spouse is moving out and has to pay rent or purchase a new home. The other spouse has to cover the existing mortgage by herself. The spouse that moves out will generally end up in a better situation because he finds something that he can afford based on his income. It isn’t immediately clear how much money it costs to run a house besides just the mortgage payment. Heating, lighting, maintaining the property all costs money. Property taxes are a killer. The divorced couple wanted their kids to stay in the same nice neighborhood, at the same nice school. It mostly worked while there were two of you contributing to the household. Now that half of that money is gone renting an apartment across town, it’s more difficult.
The inevitable happens, and the spouse remaining in the house starts to miss mortgage payments. The bank refers the case to an attorney like me, and that attorney starts a foreclosure action. The remaining spouse is worried for sure. Maybe they haven’t been reading this blog and they don’t realize how quickly their mortgage problem can get out of hand. They haven’t read that if there’s equity in the house, the best thing for them is to sell the property quickly.
The worst thing, though, is when the spouse who left the property gets sued in the foreclosure action.
Let me say that again: you – the spouse who gave up the house in the divorce – are still on the hook.
You don’t know how often I get an angry telephone call from one of the parties, who is already upset after having to give up her share of the property to her ex, wanting to know why she’s a party to this lawsuit. I have to explain to her that she is still on the note and mortgage (and maybe is still an owner of record of the property), and so she’s a necessary party to the foreclosure. She’s shocked to learn that her credit has been suffering when her ex stopped making mortgage payments eight months ago. She’s embarrassed when she applies for a Macy’s card so she can save 25% on a new bedroom set and gets declined. She hasn’t been getting those collection calls from the mortgage company, but that’s only because she thought she was no longer responsible to pay the mortgage and didn’t bother to tell the mortgage company her new telephone number and address.
I understand why this is so upsetting. Going through the divorce was hard enough. Leaving the home that you purchased so that you could finalize your divorce was not something that you wanted to do, but for the sake of moving on, you agreed. You trusted your ex to continue making payments because when you were together, you never had issues making your payments. You are now making your own payments and not having issues, and you don’t understand why your ex can’t do the same. Your ex put you through enough during your marriage and divorce; this feels like another sucker punch. I get it.
Here’s the fix, and it’s not good news. If you have a mortgage on your home, you have to do one of two things: 1) sell the house, and sell it during the divorce proceedings; or 2) the remaining spouse has to refinance the mortgage in his or her own name. There are other possibilities where the divorce settlement calls for the spouse who is leaving the house to make all of the mortgage payments going forward, but let’s be real about this – the person who can afford to pay for the house plus another place to live is not the kind of person who will ordinarily fall behind. They make too much money. That’s not you.
Selling the house is the painful reality that I posted about here, and that’s where you have equity in the house, it’s best to take that equity and move on rather than having the bank eat it up with interest arrears and legal fees.
The other option, which might take a long time and might be difficult, is to have the spouse remaining in the house refinance the mortgage. The difficulty is that applying for a refinance is the same as applying for a mortgage. You have to go through credit checks, prove your income, and work out a payoff of the existing mortgage. It can take a few months. Often times, divorce lawyers leave this part to the parties. Often times, this backfires.
A lot of times, the spouse remaining in the house can’t qualify for a mortgage on his own. That’s unfortunate, and that means that it’s time to sell. I know it’s not easy and it’s not what you want to do, but you will pay dearly for it later if you don’t do it while you’re in the divorce. If you’re leaving the house and your spouse is taking over the payments, you should be insisting upon the mortgage getting refinanced. You can’t risk your credit and you don’t want to get dragged into a lawsuit if and when your ex falls behind.
If you’re going through a divorce, it’s worth it to consult with a real estate litigation attorney to go over your options. Just like you wouldn’t go to a podiatrist if you needed brain surgery, you shouldn’t rely on your divorce lawyer for real estate advice.
Jason Sackoor is a real estate attorney in Queens, New York concentrating on foreclosure and real estate litigation. You can check out his website, e-mail him, or call his office at (718) 767-3333 to set up a consultation.