Student Loans and Bankruptcy

Two Ways To Avoid A Foreclosure During A Divorce

31 December 2015

Roy Sanders

Divorce proceedings can be pretty messy legally, but they can get even more complicated if a homeowner is facing foreclosure during a divorce. What happens if neither spouse wants the house and the debt that goes with it? What if both spouses do want the house (and associated risk of foreclosure)? Here's a look at two ways to avoid a foreclosure during divorce proceedings.

Short Sale

If neither spouse wants the house, consider a short sale. In a short sale, the homeowner agrees to sell the home for less than the mortgage amount (that's the "short" part), and the bank agrees to waive the difference. The bank is settling for taking a loss in return for avoiding a bankruptcy or complete default. When a home is short sold in a divorce, neither party walks away with the home, but neither walks away with debt either. A short sale does affect your credit, but not like a bankruptcy would. The only thing to remember is that the "short" amount may be considered taxable income, and will be divided in the divorce settlement.

Loan Modification

If both spouses want the house, but there's still a foreclosure risk, the homeowner may want to consider a loan modification. This is when your bank agrees to change the terms of your loan (again, in hopes of avoiding a complete default). It's very unlikely that the bank will reduce the principal of the loan, but they may reduce the interest rate or the loan length to reduce the monthly payment. While foreclosure is avoided, a judge will still have to award the house to one party. Things are much easier if just one spouse wants the house, as a bank will often agree to have one spouse taken off the loan in a modification.

The ultimate goal no matter who wants the house is to avoid foreclosure. In short, if both parties in a divorce decide they don't want the house, a short sale is best. This makes sure that the bank gets some of their money while relieving both divorce parties of the hassle of foreclosure. If both spouses or just one spouse wants the house, a modification of the loan terms is best.

Dealing with a divorce can be very tough legally, and dealing with a foreclosure can be devastating financially. But when these two scenarios meet, both spouses could find their credit ruined for years if they don't properly address things. But when you take the time to plan, avoiding a foreclosure in the midst of a divorce doesn't have to be difficult. Contact a lawyer, such as Jeffrey S Arnold Attorney At Law P.C., for assistance with your case.   

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