If you are going through a divorce and your home is either approaching foreclosure due to missed payments or from being “underwater” — worth less than what is owed — it’s time for you and your soon-to-be ex-spouse to consider options for dealing with the house and your collective debt. Some of the possibilities are listed below:
- Short sale — If you decide to short sale, you sell your home for as much as you can get. The bank receives the entire payment for the house and takes a loss if it is less than what you owe. After a short sale, many banks forgive your additional debt, which may end your financial obligation (or you may be obligated, under certain circumstances, to claim the amount of debt forgiven as income on your income tax returns). However, the bank could decide to obtain deficiency judgment decree. If either of these scenarios occurs, the divorce Court could determine that each of you is responsible for one-half of the deficiency judgment in the division of the debts of the marriage (but a divorce judgment changes the creditor's rights).
- Loan modification — If you decide to apply for a loan modification, you agree to restructure your mortgage or extend the period of time over which you pay it off in an attempt to make your payments more affordable. This is sometimes a feasible option for divorcing couples who wish to keep the home. But often the loan modification has to be agreed to by both parties, and sometimes the spouse who is not going to live in the house does not want to obligate themselves to this.
- Deed in Lieu of Foreclosure — You could negotiate a deed in lieu of foreclosure with the mortgage company. As with short sales, in Florida the bank responsible for your loan could come after you and your ex for the difference between the sale price of the home and what you still owe, but often they will accept the deed and agree not to come after you and your spouse for the remainder that is owed.
- Bankruptcy — Depending on your financial circumstances, you and/or your spouse may want to consider declaring bankruptcy, which may allow you to consolidate or reorganize some of your other consumer debt and continue your mortgage payments, thereby avoiding foreclosure, depending on which type of bankruptcy is filed. There are other bankruptcy options, as well, depending on your specific circumstances.
You and your spouse may also not agree on how to proceed. You should always talk to a lawyer before making these types of serious financial decisions.
Florida foreclosure defense attorney Steven Combs composed this post with contributions from attorney Robert Jeffrey.