It has become common for a newly divorced homeowner to default on a mortgage and end up in foreclosure. With the primary breadwinner no longer supporting the household, the person who took the house in the divorce may suddenly find it impossible to stay current on the mortgage. When he or she falls into default, so does her former spouse. In order to avoid further damage to their shared finances and credit, they are forced to work together—a harrowing suggestion if the divorce was less than friendly.
This of course doesn’t mean you are a couple, but banks don’t discriminate when it comes to delinquency. If you bought a house with your spouse and then you get a divorce, a divorce decree doesn’t release you from your financial obligations to the bank.
What options do divorced pairs have in foreclosure?
In the past, the couple would have simply agreed to sell the home and split the equity.
In this market, it is much more difficult to sell a home quickly.
Many couples will receive permission for a short sale from the bank, but this has disastrous credit implications for both. If money is available, the couple may agree that one or both will pay off any negative balance from an underwater home, and expedite the process of selling the home.
Another option is to refinance on the home. However, this isn’t often a viable option for someone who has been ‘halved’ in a divorce—a bank won’t approve of refinance for someone who they see as a new liability.