Bankruptcy and Matrimonial Law – they combine like oil and water
When I am working with couples who are separating, I am often asked “Who gets to keep the house?”. The answer, as in any matrimonial case, is a gray area. I will attempt to answer this as succinctly as I can giving consideration to the spouses, the Trustee in Bankruptcy (Creditors) and the Financing Company. In this scenario, the couple separate and one spouse, let’s say the husband, declares bankruptcy, and walks away from the house.
First, does the bankruptcy impact the non-bankrupt spouse (the ex-wife) from keeping the property in the eyes of the Trustee. The answer is, that depends on whether or not there is any equity in the house (is it worth more than what is owed?). If there is no equity, then the Trustee may simply release their interest by way of a Trustee’s Deed to the ex-wife for a fee (usually in the vicinity of $1000-$1500). If there is equity, it is a different scenario, as the ex-wife now has to pay the equity in the property to keep it.
Second, will the Mortgage holder require the ex-wife to get a mortgage solely in her name. Let’s assume that in the above scenario, the ex-wife keeps the house, and pays the Trustee the cost of the Deed and/or the equity (if applicable) and obtains a Trustee’s Deed, thus is now the sole owner of the property. From the Mortgage Holder’s viewpoint, the bankrupt spouse (ex-husband) is no longer liable for the mortgage debt. In most cases, as long as the loan is being paid, the mortgage holder won’t care who pays it, and will continue providing the mortgage. The ex-wife can look at financing it in her own name, but it may not be necessary, at the moment, unless the mortgage holder states that it is. And they have the right to do. But if the ex-wife spouse cannot get financing solely in her name, the mortgage holder will generally not force the issue as they do not want to foreclose and lose money, provided the payments are being made. This scenario changes once the mortgage comes up for renewal as both spouses have to sign to renew and if one is unwilling to do so, things get complicated.
The ex-spouse can also chose to declare bankruptcy, and if there is no equity in the home, can retain it and continue paying the mortgage OR can let it go and not be liable for any shortfall upon foreclosure.
I hope this provides some insight into homes, divorces and mortgage holders. An often messy and stressful combination.