Divorce and the Upside Down House

by Matthew C. Bothwell on July 28, 2011

After not speaking with your ex for months or even years you want to buy a new home.  So you pull your credit report only to realize that you are behind on payments on a house you no longer own.  To make things worse, your ex has filed for bankruptcy protection leaving you solely responsible for the home.  What do you do?

Dividing marital assets and debts is one of the most important aspects of any divorce and should be taken seriously.  This means that it is important to look at every conceivable scenario in dividing assets and plan for the worst.  This is especially when allocating any gain or loss in the value of the marital home. 

If your house is upside down (you and your spouse paid more for it than it’s currently worth) deciding who gets the house can be tricky.  Ideally, one party to the divorce assumes the mortgage and takes possession.  They then refinance the loan and relieve the other spouse of the mortgage debt.  However, if your ex agrees to assume the mortgage on an upside down home, you are still liable for the remainder of the mortgage unless your name is removed from the mortgage documents.  This is true even if provisions are included in the final divorce order requiring that your ex make their best effort to refinance the home in their name alone and requires that they indemnify or hold you harmless from any damages. 

The harsh reality is that in today’s real estate market, the mortgage on an upside down house often represents the divorcing couple’s primary debt and with banks unwilling to refinance, it may not be possible for you or your ex to solely assume the mortgage.  NO MATTER WHAT THE DIVORCE DECREE OR FINAL ORDER SAYS, OR WHAT INDEMNIFICATION OR HOLD HARMLESS LANGUAGE MAY BE INCLUDED, IF YOUR NAME IS NOT REMOVED FROM THE MORTGAGE, YOU ARE STILL LIABLE.  This is true even if you sign a quit claim deed giving the home to your spouse.  To make things worse, if your ex files for bankruptcy protection they may be able to discharge their liability for the mortgage debt as well as any promise to protect you from damages.  Basically, through bankruptcy you may be left holding the bag on a house you thought you gave up in the divorce.

So what happens next?

If your ex takes possession of the marital home and agrees to take over mortgage payments, make sure you keep in contact with them and ascertain what steps they are taking to refinance the home.   If your ex is not being proactive in assuming the mortgage in their name alone you may have to go before the judge and seek alternative remedies.  You should also keep an eye on what payments are made on the mortgage to ensure the mortgage is current and not adversely effecting your credit. (You are still on the mortgage and the bank will talk to you.)  If you find that your ex is behind on payments be proactive and protect yourself.  You may even have to reopen the divorce case and force them to sell the home.

If neither the you nor your spouse is able to refinance and the mortgage payments have fallen behind the best option may be to sell the home and try to negotiate a short sale with the bank.  If the short sale is approved, be sure to negotiate a deficiency waiver in the terms of the contract.  If no deficiency waiver is received, in Florida, the bank can still file an action against you to recover their losses. 

Being proactive is the best way to protect yourself from an ex not making good on marital obligations.  For questions concerning divorce, short sale of homes or any other family law matter, please contact Matthew C. Bothwell, P.A. at (904) 351-6640

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