But The "Ex" Is Supposed To Pay

What happens when the divorce decree says the ex-spouse is suppose to pay the mortgage but doesn’t?

September 28, 2011

Nash Law Firm, PLLC
By:  Stephen J. Nash
nash@nash-law.com

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A couple owns a home.  Both signed the promissory note and mortgage.  Unfortunately, things doesn’t work out and a divorce results.  In the divorce the home was awarded to one of the spouses, while the other is granted a lien against the property.  The spouse who was awarded title to the property was responsible for the mortgage payment and other house related costs.

This is a typical divorce outcome that is now resulting in some unintended consequences.

My Lien Secures Nothing

The first unintended result is that the spousal lien has become worthless.  Like home buyers and lenders, divorce lawyers often assumed that the value of the property would go up or at least remain the same.  With property values plummeting, the equity that was secured by the spousal lien is often gone.

But She/He Was Supposed to Make that Payment

The second unintended result is that the mortgage payments are not being made.  While the ex-spouse who was awarded the home certainly is aware that the non-payments are going to impact their credit but the other ex-spouse often is shocked to learn that their credit is also being impacted. 

How can this be?  After all, the divorce decree stated that the ex-spouse that was awarded the home was responsible for these payments.  How can their failure to make the payments downgrade the other ex-spouses credit? 

The divorce decree only determines the rights between the divorcing spouses, but does not alter the rights between the borrowers (the divorcing spouses) and their lenders.  If both spouses signed the promissory note, they are both responsible to the lender for the payments.

Yikes, I’m Being Sued Because He/She Has Defaulted

The third unintended result is that both ex-spouses can be sued by the lender on the promissory note.  This is really an extension of the second unintended result.  Many assume that if payments are not made, the lender will foreclose and the debt will go away.  The lender, however, may choose to sue the borrowers on the debt if the property value has fallen far enough.  This is very likely to occur when dealing with a second mortgage.  If the lender is going to sue on the note, they certainly will sue both ex-spouses. 

The ex-spouse who was not awarded the house will have the right to sue the ex-spouse to recover whatever damages are incurred; however, the right often is worthless because the ex-spouse has no money. 

Short Sale For Two

The fourth unintended result is that both ex-spouses end up involved in a short sale of the property.  This might come as quite a surprise to the ex-spouse who was not awarded the property.  Why should they be involved in a sale of a property that they no longer own? 

Technically, both ex-spouses are not needed to sell the property; however, both may have to participate if there is a short sale because both are still liable to the lender pursuant to the note.  In fact, both ex-spouses should want to be involved in the negotiation process with the lender to make sure that any settlement on the debt involves both ex-spouses.  Otherwise, if only one ex-spouse settles with the lender, the lender will look to the other ex-spouse to recover whatever was not paid.  If the entire debt was $75,000.00 and the one ex-spouse settles for a payment of $10,000.00, the lender will turn around and pursue the other ex-spouse for the remaining $65,000.00! 

Adding Insult to Injury

The fifth unintended result is the ex-spouse who was awarded the house files bankruptcy.  When this occurs, the entire liability with respect to the promissory notes signed by the ex-spouses will fall on to the ex-spouse who pursuant to the divorce decree no longer had to make these payments.  Since both ex-spouses signed the promissory note, both are liable on the note; however, the bankruptcy will wipe-out not only the liability to the lender but also the liability to the ex-spouse. 

So the ex-spouse was awarded a lien that became worthless, the ex-spouse who was supposed to make the mortgage payments didn’t and by filing bankruptcy shifts the entire responsibility for the mortgage debt to the ex-spouse who wasn’t suppose to have to pay them.  Not exactly the deal that he/she expected when the divorce was finalized.

Conclusion 

Until the loan is paid off or your name is taken off the loan, you remain liable to the lender even if your divorce decree requires the ex-spouse to make the payments.  As a result, given the economic realities that we are facing, the “normal” divorce settlement may come back to haunt the ex-spouse who is not awarded the property and got a lien instead.  Not only is the lien worthless but their credit is dragged down because the ex-spouse failed to pay the mortgage.  Worse yet, the ex-spouse may be sued by the lender on the promissory note!                  

Not only exactly what was intended.         

NOTICE The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation. Copyright 2011 Nash Law Firm