When the House Mortgage is Underwater and You're Divorcing

Man working on paperwork with Scales of Justice on desk

What do you do when you are divorcing and need to come to an agreement regarding a property settlement, but your house, formerly your largest asset, is now underwater?

Let's say that neither you nor your partner can afford to take on the mortgage individually. Here are a few options that others in your situation have chosen to do:

  • Short sale. A short sale means that you sell your home for less than the mortgage, but the lender agrees, collects the sale proceeds, and cancels your debt fully.
  • Squat. You and your spouse remain in the house but stop paying the mortgage. At a certain point, the bank or mortgage lender will begin foreclosure actions, but that could take a year or longer. The one caveat is that in some cases, the lender could potentially seek to obtain the difference in cost of the house if it sells for less than the debt on the house at the time of foreclosure.
  • Roost. Both of you choose to stay in the home, sharing mortgage expenses until such time as the house can be sold for the remainder of the mortgage balance.
  • Jingle mail. Each of you leaves the home and just gives the house back to the mortgage company. Essentially, you are walking away from your debt. Potentially, however, the lender could come after you for the mortgage balance remaining unless the bank agrees to cancel the remaining balance and let you walk out debt-free. The "jingle" comes from the jingle of the house keys sent in the mail.
  • Bankruptcy. When you file for bankruptcy BEFORE your divorce is final, the debt can potentially be canceled, but you will need to leave the home. It is important to discuss the implications of bankruptcy pre-divorce, post-divorce and joint bankruptcy. There are definitely issues to watch out for in each situation.
  • Deed instead of foreclosure. You and the person you are divorcing deed the house over to your lender and the lender forgives your remaining debt.

If you choose to stay in the home on your own, it is likely that you will need to refinance, so that you are the person listed as the owner on the home, and responsible for the mortgage, not your spouse.

If you cannot refinance, it may be possible to work a deal with your spouse so they will allow you to keep their name on the house ownership papers as long as you guarantee that they will avoid incurring any liability for the mortgage debt. Or, the house payments could be part of a support arrangement you work out with your spouse.

Contact Pfister Family Law

At Pfister Family Law, we have protected the rights of people across north Texas for more than 20 years. Board-certified in family law by the Texas Board of Legal Specialization, attorney John J. Pfister, Jr. understands that every case is different and will take the time to learn the details of your situation. We will then carefully craft an individualized approach to help you get the outcome you want.

For an appointment with an experienced divorce and child custody lawyer, contact our office by e-mail or call us at (972) 370-5172.

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