If I understand your facts correctly, your options are:
- Mortgage modification, which would not release your ex-spouse from the mortgage and thereby defy your divorce agreement.
- Short sale, but the junior mortgagee will not release you from the deficiency balance.
- Foreclosure, but then face a deficiency balance by one or both mortgagees.
What you describe is called a Morton’s Fork, which is the choice between equally unpleasant alternatives.
You may have another alternative in the Home Affordable Foreclosure Alternatives Program (HAFA), which I discuss below. Before I do, let me discuss the issues you face.
Foreclosure is the legal process through which a lender (most typically a mortgage lender) repossesses an asset from the consumer borrower who has defaulted on their mortgage payments. Because foreclosure is expensive and usually results in a poor return, lenders do not like foreclosure any more than homeowners do. Accordingly, I will discuss the HAFA program below, which is a federal program that offers financial incentives to lenders and homeowners to avoid foreclosure.
Virginia Mortgage Foreclosure
According to Virginia Title 55, in the event of a foreclosure, the mortgagee can pursue a deficiency judgment. If the foreclosure sale results in a deficiency a Virginia court must confirm the fair market value of the property is credited to the mortgage. However, if the mortgagee participates in the HAFA program, then according to the federal guidelines, the mortgagee may not pursue you for the deficiency balance.
The foreclosure process is expensive for all parties concerned, and the cumulative effect of many foreclosures can depress housing prices. To stabilize the housing market, the Obama administration created the Making Home Affordable (MHA) initiative. One program in MHA is Home Affordable Foreclosure Alternatives (HAFA). HAFA sets guidelines for short sales and deeds in lieu of foreclosure for distressed homeowners. If your servicer (the financial institution collecting your mortgage payments) participates in HAFA, then the servicer must follow HAFA's guidelines and deadlines. The guidelines provide financial incentives for both servicers and homeowners. The homeowner must also be eligible for the Home Affordable Modification Program (HAMP) as set forth by the program guidelines.
Let us say for the sake of argument you select an option that results in a deficiency balance. A deficiency balance is an unsecured debt, and is treated the same under law as credit card debt, medical bills, or a payday loan. A deficiency balance will not result in wage garnishment or a levy of your financial accounts if you resolve the debt. You have several options for resolving unsecured debt including debt settlement and bankruptcy.
Bankruptcy is a complicated process. Chapter 7 and Chapter 13 bankruptcy are the options appropriate for most consumers seeking debt relief. Unfortunately, after the passage of the Bankruptcy Reform Act in 2005, it became harder to file for a liquidation bankruptcy, and there is now more complexity to an already intimidating process. Filing bankruptcy can be difficult and, though a consumer can do themselves, I advise consumers to consult with an attorney licensed in their state to ensure the filing is completed accurately.
You mentioned you want to avoid bankruptcy. Most people do. It may be a viable option in your situation, and you would be wise to weigh its positives and negatives before ruling it out preemptively.
Research HAFA. Ask your mortgagees if they participate in the MHA program. If so, they must offer HAFA to you. A short sale through HAFA appears to be the best solution in your present situation because it frees you of the property, allows you to comply with your divorce agreement, and will result in a minimal impact on your credit score. If you are unable to do a short sale or deed in lieu of foreclosure (options that will not affect your credit score), you may wish to let the property foreclose and take the hit on your credit score. Then you may wish to resolve the deficiency balance either through negotiating a settlement or through bankruptcy.
Another option to consider is to open a negotiation with your ex-spouse. Obviously, I know nothing of the dynamics or history between you two. However, if she is sympathetic to your plight, perhaps your ex-spouse will offer a forbearance on the requirement that you sell or refinance the property until market conditions stabilize and the property values increase in your area.
I hope this information helps you Find. Learn & Save.