Ex-Spouse & Foreclosure
My spouse is on an ex's mortgage. Foreclosure is imminent. What can we do to avoid liability and a credit report disaster?
My husband's ex-wife still has a mortgage and credit cards that she obtained using my husband's information. Pursuant to the divorce decree she was to refinance the home in her name only. She has the home but has not refinanced and we recently discovered she is 3 months late on payments. We obtained the info through his credit report which of course is being ruined by the late mortgage and credit cards. She has to be facing foreclosure at this point, what are our options to prevent his liability and further damage to his credit. Do we have recourse for the time since the divorce?
I hear variations on this question frequently.
A mortgage is a contract. A divorce is a contract. One does not trump the other. Just because a judge signs a divorce decree does not make the divorce any more special than a mortgage.
I will assume the mortgage and credit cards in question are joint accounts in the names of both ex-spouses. Here, the ex-spouse agreed to refinance. For whatever reasons, the ex-spouse failed to refinance the house, which makes the ex-spouse in violation of the divorce agreement. The ex-spouse does not have an excuse for closing the credit card account(s) and opening new ones in her name alone. In fact, if the accounts are jointly held, either spouse can close the account.
What can the non-occupying ex-spouse do?
An ex-spouse has liability for a joint mortgage and any joint credit cards.
Regarding the damaged credit report, non-occupying, ex-spouse's options are very limited. They are limited because from the mortgage servicer's perspective, both names are on the mortgage, the mortgage is delinquent, and therefore both parties may have this activity reported to the credit reporting agencies.
In this case, the credit score damage is ongoing because the ex-spouse's name is still on the mortgage, and may be on the joint credit cards. Asking the mortgage company to report only the occupier of the property to the credit reporting agencies will fall on deaf ears. Ditto for the credit card issuers.
A credit score, however, is the least of the worries for the ex-spouses here. Should the mortgagee foreclose, the ex-spouses share liability for any deficiency balance. That means that if the balance of the loan is $100,000, and the home eventually sells for $75,000, the ex-spouses are jointly liable for the $25,000 shortfall. If the occupying spouse is facing foreclosure, he or she should consider their options in the HAFA program.
I see three options for people in this situation.
The non-occupier is harmed if the occupier fails to refinance. The fall in home values put many recently purchased properties under water (i.e., worth less than the balance of the mortgage). In the mortgage trade, underwater mortgages are known as "100%+ LTV," where LTV stands for "loan-to-value." People with 100%+ LTVs oftentimes have a difficult time refinancing.
To assist homeowners in this situation, the Making Home Affordable program created HARP Mortgage Refinance program. See the Home Affordable Refinance home page to learn more about this program.
If the occupying homeowner cannot afford any of the costs of refinancing in HARP, it may be in the non-occupier's long-term best interest to offer to pay the closing costs. These costs could be written into a contract that the occupier will repay them when the house is sold eventually. Or, the costs could be put into a lien on the property. Parties considering this route should have a non-hostile relationship with each other. The agreement should be reduced to writing and, at minimum, mediated by an attorney.
The non-occupying spouse can sue the occupying spouse for breach of contract. The plaintiff can sue in a court of equity, and ask the court to force the defendant to act on their promise to refinance. This is an extreme response, and probably and exercise in futility in light of the widespread, deep decline in housing prices. Alternatively, the non-occupying spouse can ask a court of equity to force the sale of the property. This too is fraught with pitfalls, and a court may not accept this extreme measure.
If the ex has not refinanced because the value of the property is less than the loan balance and the ex cannot find a bank to refinance the mortgage, then a lawsuit would be pointless. Nevertheless, this is an option to discuss with an attorney in your state if the other two options are not possible.
The non-occupier, if he or she qualifies, can file for Chapter 7. Assuming this spouse has no assets, a Chapter 7 bankruptcy would extinguish the mortgage and credit card liabilities. It will also cause damage to the non-occupier's credit score. However, this will recover in time.
Consult with an attorney in your state who has experience in bankruptcy. He or she may have other options that are available to residents in your state.
I hope this information helps you Find. Learn & Save.