What Happens When You Get Divorced & Your Mortgage Defaults?

A divorce proceeding can be complicated under the best of circumstances. When real property is involved, it can become more complicated. If you have been through a divorce, or are considering a divorce, and you have a home or other property that has a mortgage attached to it, you should have a clear understanding of your state's laws with regard to marital property as well as the repercussions of a default on the mortgage.

Marital Property Laws

Marriage and divorce laws are determined at the state level. Individual state laws dictate the grounds for a divorce as well as the rules regarding division of assets and debts. As of publication, nine states are community property states, meaning that all property acquired during the marriage is considered to be owned by both spouses equally. All other states use some form of equitable distribution theory. Under an equitable distribution theory, property acquired during a marriage is owned by the spouse who earned the funds to purchase the property. During a divorce, the court will consider who earned the money to buy the property as well as what would be a fair distribution of the property when deciding who will be awarded the property.

Division of Assets and Debts

When a couple decides to get divorced, all marital assets and debts must be divided, including real property. The couple may agree to divide the assets and debts without the intervention of the court through a marital separation agreement or the court will divide the assets and debts in the absence of an agreement according to the state's community property or equitable distribution laws. If the court awards real property to one party, the other party is generally ordered to give up his interest in the property by executing a quitclaim deed. Although this serves to terminate one parties' interest in the title to the property, the mortgage may still be in both names. When a property is mortgaged, and the court awards the property to one party, the court may require the party to whom the property was awarded to refinance the mortgage in her name alone. The court could, however, award title to one party yet require the other party to satisfy the debt by continuing to pay the mortgage. The important thing to remember is that the title and the mortgage are two separate issues for the court to decide.

Default Before Final Decree

If the mortgage is already in default when the divorce is filed, or falls into default while the divorce is pending, then the court will address the issue before the final decree is entered. If neither party is able to cure the default alone, then the property will go into foreclosure. In most cases, a deficiency amount will still be owed after the foreclosure. The court will decide who is responsible for the deficiency as part of the division of debts in the final decree.

Default After Final Decree

If the property was not in default at the time of the final decree, but later falls into default status, then the party who was ordered to be responsible for the mortgage debt in the final decree is responsible for the default and any subsequent deficiency amount. If, however, both names are still on the mortgage, then the lender may still attempt to collect the debt from both spouses. State laws vary with regard to situations where both names remain on the mortgage; however, the remedy in this case generally lies with the court that entered the final decree. In other words, although one spouse may have been ordered by a court to pay the mortgage, the lender may still be able to pursue both spouses if both names remain on the mortgage. A contempt of court proceeding against the spouse ordered to be responsible for the debt may be the best option at that point.

References

• Cornell University Law School: Divorce
• Montgomery Family Law: North Carolina Property Division During Divorce
• HUD: Foreclosure Process
• LegalZoom: Comparing Equitable Distribution and Community Property