Divorces have some awful consequences for both parties, but one issue that is becoming all to familiar in my bankruptcy practice is having an ex-spouse file for bankruptcy before refinancing the marital home. The typical situation looks like this:
- a couple divorces with one ex-spouse keeping the home, but both parties' names are on the mortgage;
- the ex-spouse moving out of the home quit claim deeds his or her ownership in the home to the other ex-spouse;
- the ex-spouse keeping the home promises (either in the MDA or otherwise) to refinance the house;
- the ex-spouse doesn't refinance or is unable to refinance;
- the ex-spouse runs into financial trouble (i.e., late mortgage payments, job loss, etc.); and
- the ex-spouse ends up filing for bankruptcy.
After all that, the ex-spouse who moved out of the house has the missed mortgage payments show up on his or her credit report or, worse, the ex-spouse who kept the house turns it over to the mortgage company during the bankruptcy. The worst part is that the innocent ex-spouse not longer has any ownership interest in the house, thanks to the quit claim deed.
However do you avoid this? First, don't sign a quit claim deed until the mortgage is refinanced. Your divorce attorney should be able to put this provision into the divorce decree. Second, make sure there is a deadline for the ex-spouse to refinance. If the ex-spouse cannot refinance, maybe you require the house to be sold (obviously, this might be a problem if your children still need to live in this house). Regardless of how this happens, you do not want to be facing credit problems (or worse, your own bankruptcy to avoid being on the hook for the mortgage) if your ex-spouse doesn't or can't refinance the mortgage. That quit claim deed only waives your ownership in the house. It does NOT mean that you are no longer liable for the mortgage. Sure, the divorce decree may say your ex-spouse will be solely responsible for the mortgage, but the mortgage company is not required to let you off the hook. Just make sure your name gets off the mortgage as soon as possible.
