During a divorce in Arizona and in other community-property states, the parties often decide that one person will keep the family home and continue making payments while the other person will sign over their interest on the home to their spouse. However, if one partner decides to file personal bankruptcy, the mortgage company might not recognize the actions of the divorce proceedings, which means they could hold both partners accountable for the loan. The lien holder does not need to recognize the actions of civil court in the divorce or remove the person’s name from the loan.
The divorce decree specifies ownership of the home along with who will continue to pay for the home. However, the lender has a legal right to pursue financial reimbursement from either party. They are not concerned with the details of the divorce decree. Even though the spouse with no interest in the home has filed bankruptcy, their name is still on the paperwork. The current owner has two options to resolve the issue: they can sell the home or refinance it.
In some cases, parties will sign a reaffirmation agreement, which is a promise to pay a debt that otherwise could have been included in bankruptcy court. Some lenders require this agreement in order to give the person’s information to the credit reporting agencies. However, this agreement is not necessary because the party has signed over their interest in the residence. The person is now protected from liability because they filed bankruptcy. The spouse will keep the home as long as they continue to make the payments. Contact a Phoenix bankruptcy attorney if you have further questions regarding this sometimes complicated issue.
A bankruptcy by one party can complicate divorce matters even after the divorce is final. A bankruptcy lawyer might be able to help clients resolve these complicated matters, especially when a home is involved.
Source: Fox Business, “How Does Divorce Affect Bankruptcy and Mortgage?“, Justin Harelik, July 03, 2013