January 1, 1900

by Michelle M. Monte

A common scenario for mortgage foreclosure actions arises when parties to a divorce are not aware that they both are still obligated on their mortgage indebtedness even if the terms of their divorce judgment indicate that one spouse is no longer responsible for the monthly payments. Such a situation may arise, for example, where the former husband has deeded his interest in the subject property to his former wife with the understanding that he will continue to pay the monthly mortgage payments but then fails to do so. The terms of the divorce agreement are a contract between the parties to the divorce and do not affect their liabilities under the terms of a prior executed mortgage and promissory note. Thus, the ex-wife remains liable to the bank or mortgage company, and the property remains as security for the loan despite the new deed.

The Note to Borrow Money is a Contract

Many people, who borrow money and agree to collateralize the loan by placing a mortgage on real estate, do not realize that the note or loan agreement that they execute at their mortgage closing is an actual contract between themselves, as borrowers, and the mortgage company or bank as lender. That contract obligates the repayment of the debt regardless of the events which occur after the closing. The mortgage document executed with the note or loan agreement is the security instrument which authorizes the lender to foreclose on the property and sell it at a sheriff?s sale in order to recoup the amount due. The terms of a subsequent divorce judgment are only between the two divorcing parties. Unless the lender consents to release one of the parties, the judgment has no effect on the original contract to borrow money. Thus, both divorcing spouses are still obligated on the mortgage debt to the lender, and the property remains subject to foreclosure if the monthly loan repayments are not made.

Refinancing the Mortgage: Possibilities and Difficulties

Another problem which can confront mortgagors, who are going through a divorce, is the potential available funds to pay off the loan may diminish. In many cases, the income of both spouses was necessary to pay the mortgage debt. In a divorce, the parties' formerly joint income usually becomes stretched to support two households. This situation may cause the ex-spouse, who is responsible to pay the monthly mortgage payment, to default, while the other party is unable to refinance or modify the debt because he or she cannot show sufficient income alone.

Where one of the mortgagors can afford to make the monthly payments on his or her own, the parties should seek to refinance the debt in order to remove the other spouse from liability. If a refinance is not possible, the party, who is not responsible for payments, should attempt to obtain an executed release from the lender. However, the lender is not obligated to release either mortgagor from the debt; so if the financial situation of the single party is not sufficient to support the debt alone, the lender will generally not grant a release.

In any case, it is important for both parties to recognize their respective obligations, and that the property may still be at risk despite the divorce. In presenting the case to the court or in reaching a settlement agreement, the parties must consider the effects of the mortgage obligation. Legal counsel can make the options clear and help formulate a satisfactory economic solution.

Michelle M. Monte is an associate of Hill Wallack where she is a member of the Real Estate Division and the Creditors' Rights/Bankruptcy Practice Group.