All About Short Sales and Foreclosures for Divorcing Couples in NJ
Divorce and Real Estate Lawyers Explain Potential Actions and Ramifications of Short Sales and Foreclosures to Handle House Debt in New Jersey
Property division in a divorce can be complex, especially when you own a financially upside-down house. After the 2008 housing market crash, many homeowners found that they owed more on their houses than what it was worth on the market. Many walked away from homes they owned for dozens of years, and banks took them back in foreclosures. The lender or mortgage holder can take your home to foreclosure when you cannot pay the mortgage.
Others took advantage of short sales, saving the lender time, costs, and foreclosure fees. When the bank or other lender accepts a below-market sale in exchange for avoiding foreclosure, the owners no longer have monthly mortgage payments. In other words, you “sell” your house to the bank for a price below what you owe on your loan, but the bank gets the property back quicker and less expensively than a foreclosure, which could take over a year. Foreclosure procedures can take several months to comply with legal notice requirements, and evicting house occupants can take longer.
In divorce, the foreclosure process may be more complicated. When spouses divorce, they divide the assets and debts of the marriage. A house is a debt when there is a loan balance. But when there is equity in the home, meaning the house sale price exceeds the loan balance, the house is an asset. When the loan balance exceeds the house value, the home is a debt both spouses bear when they are the borrowers. And if neither spouse can make the mortgage payments alone, the house may go into foreclosure.
The correct course to take for a divorcing couple is always unique to their situation. To best handle the house involved in your divorce case, it is important to know what the tax, credit, and long-term debt consequences are for their circumstances when it comes to resolving house debt. For this reason, the sound advice of tax specialists, divorce lawyers, and real estate lawyers can be invaluable to chart the right course for a divorcing couple.
Having handled countless real estate and divorce cases over more than a decade since our firm was founded, our attorneys at Bronzino Law Firm can assist you with every aspect of your divorce real estate matter involving a foreclosure, short sale, property division agreement, or deed in lieu of foreclosure. We may also advise you to talk to your accountant before choosing a course, after which we can help ensure that all of your bases are covered in the proper legal process to protect you moving forward. Call (732) 812-3102 for a free consultation, and let our real estate and family law firm assist with your needs.
Understanding How Foreclosure Works in a Divorce Context in New Jersey
When both spouses cannot afford the house during a divorce, they may have to let it go to foreclosure. In that case, the lender gives the homeowners notice of default for the payments owed and time to satisfy the outstanding balance. When they do not meet that deadline, the lender serves the homeowners with the foreclosure complaint and summons regarding judicial foreclosure. Though divorcing spouses are relieved of the monthly mortgage payments after foreclosure, they are still liable for the outstanding loan balance deficiency, the difference between the loan balance and the sale price. And foreclosures result in adverse credit, so buying another house may be difficult.
Exploring the Alternatives for a House with No Equity During Divorce
With competent legal advice, divorcing parties can explore options regarding a house with no equity. When a home has equity, the parties can sell the house and split the proceeds. And one party can buy the other out or keep the house in exchange for other assets in a marital settlement agreement. However, the options in divorce for a home without equity are to keep the house, let it go to foreclosure, short-sale it, or surrender the deed in lieu of foreclosure.
Refinancing the Loan as a Way to Keep the House
A spouse’s house option depends on the couple’s overall financial picture and loan status. When a couple falls behind on mortgage payments, they may have limited choices. Even though a couple may have valid reasons for falling behind on mortgage payments, such as illness, job loss, or separation, lenders expect timely payments. So, when one spouse wants to keep the house, they can refinance the loan. In that way, one spouse can assume the loan balance, plus any overdue payments, and take the other spouse’s name off the loan. But that option is only open to those who qualify for a loan, meaning they must apply and show sufficient income to pay it.
Up’s and Down’s of Requesting a Loan Modification
Another option is to work with the current lender on a loan modification. A bank can add late payments to the current balance and extend the loan, lowering the payments. Paying down the loan longer may increase the equity when house prices rise. The disadvantage is having both spouses on the loan and title to the property when a divorce seeks to sever the marital ties to the most significant extent possible. A similar problem to refinancing exists when one spouse attempts to assume the existing loan in their name. They must qualify as a borrower on their financial profile.
Opting for a Short Sale Approach
When neither can afford to keep the house, they can opt for a short sale. A couple can sell their home for the highest price the market will bear. When that price is lower than what they owe to their lender, they can present a buyer’s purchase offer to the lender for approval. Typically, a bank wants to know the reason for a short sale. So, when borrowers fall behind on payments due to circumstances beyond their control, such as unemployment or illness, a bank may consider a short sale.
Can a Bank Accept a Lower Offer for the Property?
The incentive for a bank to accept an offer lower than the loan amount is to avoid the time and costs of foreclosure. When a bank understands the borrowers cannot pay the mortgage and it would have to sell the property anyhow, they can accept the shorted loan balance payoff to save time. The bank may understand they could not sell the property for more than the buyer’s offer and may forgive any deficiency. Suing for the deficiency may cost more than what they would get from the buyer. However, the spouses suffer tax consequences from the canceled loan debt.
Implications of Giving a Home to the Lender with a Deed in Lieu of Foreclosure
Along the same lines, a lender may accept a deed in lieu of foreclosure. In this scenario, the borrowers transfer their property to the lender by signing a deed. The bank then has the title to the house and can sell it. The motivation, once again, is to avoid the time and cost of foreclosure through the judicial system. The borrowers may negotiate forgiveness of any deficiency but probably cannot prevent the canceled debt consequences.
Questions About Foreclosures and Short Sales in Divorce Cases? Contact our Law Offices in Brick and Sea Girt NJ
Our lawyers at Bronzino Law Firm understand the complexities of situations involving short sales and foreclosures, especially those occurring in the context of a divorce, and we can advise you competently and coordinate other professionals to help you prepare paperwork for short sales or deeds in lieu of foreclosure. We can assist with covering all of your bases in the divorce and ensuring that you understand and have explored all possible options before deciding on your next steps. If you need to talk to an accountant, we can recommend that you talk to a financial professional, then carry out of the course you choose in your division of assets, alimony, and marital settlement agreement, ensuring you have everything you need for your situation.
Contact us at (732) 812-3102 for a free consultation today. We serve the entire Monmouth and Ocean area, including individuals and families in Berkeley, Toms River, Sea Bright, Red Bank, Lavallette, Rumson, Wall, Mantoloking, Lakewood, Point Pleasant, and Manasquan.