My husband and I own a house in CA. We are in the process of divorcing. We have a first and second mortgage, and owe more than the house is worth. If he defaults on the first or second mortgage can the banks come after my personal & separate savings?
California is a “community property” state, which means that many assets and obligations of one partner in a marriage become “community” assets or obligations. By extension, this can mean that one spouse can be held liable for many of the debts of the other spouse even if his or her name is not on the accounts which resulted in the debts.
Because your mortgage loans were incurred to finance the purchase and upkeep your marital home, the debt would likely be considered to have benefited the marital community. Therefore, both spouses may be liable for the mortgage even if only one of the spouse’s names is stated on the loan documents.
In most cases, a divorce would not affect the spouses’ liability for joint or community debt; even though your ex-spouse may have agreed to pay the mortgage as one of the stipulations of your divorce decree, if he fails to make his payments, the creditor would have every right to pursue both you and your husband for payment of the debt. A divorce decree is an agreement between two former spouses, but it generally does not modify any contracts with third parties made before the divorce.
If your husband does not pay the mortgage, you may have grounds to sue your ex-spouse for violation of the divorce decree to require him to pay the debt or to compensate you for any payments you were forced to make on a debt for which he had agreed to be responsible. To read more about community property laws, you can visit wikipedia.org.
When a home is foreclosed upon, the mortgage lender usually auctions the property at a foreclosure sale, applying whatever amount is received at the foreclosure sale to the balance owed on the mortgage. In many cases, the sale price at auction is not sufficient to cover the mortgage and other secured liens on the property, such as home equity loans; the difference between what you owe on the property and what the lenders actually receive is called a deficiency balance.
Under California law, lenders cannot collect on deficiency balances resulting from "purchase money loans." If your first mortgage is the same loan which you and your husband used to purchase your home, and you have not refinanced the loan since the purchase, your first mortgage lender will likely be unable to collect any deficiency balance resulting from foreclosure. However, lenders who provided “non-purchase money” loans, such as second mortgages, home equity credit lines, or refinance loans, are generally able to pursue former homeowners for payment of deficiency balances not covered by the proceeds of the foreclosure sale. So, assuming you have not refinanced your first mortgage, you likely do not need to worry about your first mortgage lender pursuing you for payment. However, you will likely be responsible for any deficiency on your second mortgage, home equity loans, or any other obligations secured by your home.
California residents with questions regarding community property law should consult with an attorney experienced in California family law. An attorney should be able to determine whether you would have liability for debts that your ex-spouse took over in your divorce proceedings. In addition, an attorney will explain what possible actions lenders may take to enforce the debt, and your options to protect your assets.
For example, filing for Chapter 7 bankruptcy protection may discharge your liability for these obligations, and prevent any collection action against you even if your ex-spouse allows the mortgages to go into foreclosure. If you would like to learn more about bankruptcy, and how it may protect you, visit the Bills.com bankruptcy information page.
I hope that the information I have provided helps you Find. Learn. Save.