Why it’s a bad idea to leave both spouses on a mortgage after the divorce

Until about a decade ago almost everyone had equity in their home. When home-owning spouses wanted to end their marriage they would either sell their house and divide the equity or one spouse would refinance the home to get the mortgage out of the other spouse’s name and provide that other spouse some of the home equity. Often, folks could use the home equity to pay their attorneys’ fees.

Nowadays, many couples have no equity in their homes. Further, mortgage lenders have greatly tightened their lending standards and it is much harder to refinance mortgages unless there is 20% equity in a home. Thus many couples going through divorces now resolve their case with both parties remaining obligated on the marital home mortgage while one party retains control of the property. Experience indicates this almost always causes problems for the party relinquishing control.

One problem arises when one party promises, as part of the separation agreement, to refinance the marital home to get the debt out of the other party’s name. Until this refinancing occurs both parties remain liable to the mortgage holder. If the party who agrees to pay the mortgage fails to do so, that creditor can pursue collection from the other spouse. Thus, until the refinancing occurs, the spouse who expects to be removed from the mortgage must monitor the mortgage monthly to insure the other party is paying it.

Further, marital debts are dischargable in bankruptcy and the bankruptcy court overrides the family court. Often one party has given up something of value in return for the other party being obligated on the mortgage. If the other party’s obligation on the mortgage is discharged in bankruptcy, the mortgage holder can seek collection from the party who expected to be relieved from this obligation as part of the separation agreement. That party has no recourse against his or her ex-spouse and has given up something of value while losing the benefit of his or her bargain.

Finally, it can be hard to enforce an “agreement” to refinance the mortgage, as the ability to refinance the mortgage may be out of the other party’s control. If no lender is willing to refinance the mortgage, a family court is unlikely to hold a party in contempt for failing to refinance. Thus separation agreements that leave one party with control of real property that both parties remain indebted on pose serious risks to the party that relinquishes control of that property.

Additional problems arise when the parties agree to allow one party to remain in the marital home for a period of years with the expectation that the home will be sold at some future date–often when the children are emancipated. In addition to the problems noted above, these agreements create problems of misaligned incentives. If the party relinquishing control of the property expects to receive a set dollar amount when the home is sold, the controlling party has every incentive to delay the sale–especially if both parties have agreed to pay a portion of the ongoing mortgage. If the party relinquishing control of the property expects to receive a percentage of the equity when the home is sold, the party remaining in the home has reduced incentive to maintain the home. While it is theoretically possible to draft these agreements so that both parties’ incentives are aligned, experience shows that the party remaining in the home is often able to frustrate the other party’s expectations.

There may be times where keeping both parties on the mortgage after the divorce is the best of a number of bad options. Typically, this occurs when one or both parties cannot endure the negative consequences of a foreclosure or short sale–such as when one party has a security clearance but isn’t in a position to keep the home. In these circumstances the attorney for the party relinquishing control of the property should warn of the risks involved, and counsel that party to monitor the mortgage vigilantly to insure it remains current. However, in almost every other circumstance, there are few benefits and a number of risks in allowing one’s client to remain on the mortgage while relinquishing control of the property.

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