Many of the short sales that we see in our office are as a result of divorce moreso than for any other reason. This is an excellent recap of how separation and divorce can affect home ownership.
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Although we are years into a dramatic period of real estate deflation, divorce lawyers and judges have not been able to move from traditional solutions to new solutions that work in this recessionary economic environment. The traditional ways of dealing with real estate in a divorce setting has changed. Existing divorcees and those in the planning stages all are potentially affected. Existing handling of divorces usually cause havoc with attempts for Short Sale, Loan Modification or Deed in Lieu solutions.
What's the Problem?
Traditionally, the property that husband and wife accumulated during the marriage is divided by some mutual agreement or by an order of a court. In the past, when real estate was essentially liquid (meaning it could be sold at a market value reasonably determined and within a forecast period of time) and values were rising or at least flat, it was a simple matter to liquidate the real estate property or get it refinanced, removing the other spouse from liability. The traditional experience of lawyers and judges along with the clients is no longer today's reality. Today removing the liability is usually impossible. This was discussed in my article DIVORCE - CHAINS TO THE UPSIDE DOWN HOUSE VALUE CAN BE BROKEN!!!
Judges Cannot Change a Mortgage
The primary problem that I see is centered around the misconception that a divorce decree coupled with a court order that says that one spouse is no longer responsible for the debt of the other spouse along with the mortgage of the house awarded to the other spouse, is binding on the mortgage lender too. In reality, "responsibility" can only be dictated as between the husband and wife - but not with the lender and the parties. Under the laws of the United States, the contract between a borrower and a lender cannot be modified by a court order, unless at the very least the lender is made a party to the divorce lawsuit. That never happens. Even if it did, a court cannot modify that contract (the note and mortgage). Only the parties to the contract mutually agreeing to the change, can modify the note and mortgage.
Is This Protection?
The typical marital settlement agreement and/or court order on the distribution of real estate generally has some rules:
1. The party that gets the property, where it is subject to a mortgage, must pay the mortgage and indemnifies the other borrower (former spouse) for any "damages" resulting from the non-performance of the new sole owner party. Typical language is, "Each party shall be solely liable for the attendant liabilities on each property they own and each shall pay, indemnify and hold the other harmless of any liability associated with their respective properties."
2. Each party usually is not to incur debt that will affect the other party. If that happens there is an indemnity in favor of the damaged party.
3. If there are multiple properties, the properties are usually divided between the parties with each party being responsible for the property it receives - which means subject to any mortgage on the property that the new sole owner must service.
Unfortunately, when it comes to mortgaged real estate, none of these otherwise solid clauses gives any protection.
Real Life Examples
Every week someone is in my office with a real estate problem that has been exacerbated by the illiquidity of today's market. Here are some examples:
1. Husband and Wife are both on the mortgage and in divorce, Wife gets the marital home subject to mortgage that has now become greater than than the value of the property. Wife loses her job and/or former husband has dramatic decrease in income and cannot pay support / alimony. Wife cannot pay mortgage without the contribution of husband, or the wife's contribution is now insufficient. The mortgage goes late adversely affecting the credit of both borrowers and eventually the bank files foreclosure on both the former husband and the former wife. Both parties' credit scores and history are damaged and deficiency for any shortage upon a foreclosure sale could reach both husband and wife, in spite of the well meaning court order.
2. Multiple properties were equitably distributed and all were encumbered with individual mortgages. The properties were distributed in a fashion that the person getting sole title to the property was in some cases not the person obligated on the promissory note associated with the property. For example, the former wife was obligated on a note attached to a property awarded to the former husband.
So what typically happens is that the person with the property stops paying the mortgage and the person that does not own the mortgage but is on the promissory note secured by the mortgage on the property (and possibly the only one on that promissory note) has no remedy whatsoever except the "indemnity and hold harmless agreement" of the non-paying former spouse. (A lot of comfort that indemnity is going to be now that it is needed!)
Opportunity for Vindictive Spouse To be Vindictive!
What about a short sale or a deed in lieu of foreclosure? Generally the property owning party becomes uncooperative and will not enter into a listing agreement or any deed in lieu of foreclosure agreement. Often this is for spite and other times it is because the one party is trying to "extort" money from the other party. Regardless of the reason, the obligated party could be "up a creek without a paddle".
There are plenty of scenarios and they all have the same end question asked by the party that is being damaged - what can I do?
Unfortunately, existing property settlement agreements and orders are already fixed in their wording and nothing short of a court enforcing some terms of the agreement (like, no party will incur additional debt obligating the other party - clearly breached when the mortgage goes unpaid and the other party is obligated jointly or solely on the promissory note). I was working with a divorce attorney and her client this week and we came up with a motion to enforce the settlement agreement, a portion of which is attached to the end of this article for some guidance.
Solutions in the Event of Foreclosure
Planning for problems is best done in the beginning - not after the court order granting divorce is signed. Settlement agreements and court orders should provide for enforcement alternatives when one party not obligated on the promissory note is awarded encumbered property. One enforcement provision should be a return of the property to the person who is obligated on the promissory note. If both parties are jointly on the note, then a forced partition of the property should be a remedy - including authorization by the court or by the non-defaulting party to have sole ability to deal with the lender, sign listing agreements and contracts to sell the property in a short sale, deed in lieu of foreclosure or traditional sale.
Essentially, if a party is unable to honor its obligations regarding the property, they should lose control of it to the other party - provided the other party disposes of the property as outlined in the court order or buys-out the defaulting party of any equity.
A problem that is common in this market situation is that one spouse, usually the wife, obtains real estate in the divorce or is expecting to see a distribution from the disposition of the real estate either through a refinance or sale. When the distribution is not going to happen because of a short sale or foreclosure, the shorted spouse usually becomes uncooperative with orderly disposition of the property. This is where pre-conceived language in a marital settlement agreement or final judgment of divorce can be helpful.
Real Life Motion to Enforce a Marital Settlement Agreement When Foreclosure Looms
West Palm Beach divorce attorney Robin Roshkind recently filed a pleading that addresses some of the issues discussed above. The situation was that the husband as part of the "breaking up" pre-divorce purchased for the wife a residence so he could be sure she could adequately house herself and their children for which they had shared custody. The husband put the house in their joint names and signed the note. The wife subsequent to the divorce, where she was awarded the home and given adequate child support to pay the mortgage, stopped paying the mortgage, putting the home into foreclosure. The husband has negotiated a deed in lieu of foreclosure but the former wife refuses to pay the mortgage or sign the deed in lieu documents. All of the "safeguards" discussed above were included in the marital settlement agreement.
The motion filed with the court is substantially like this (much of the legal form language is removed to shorten the text):
1. Final Judgment of Dissolution of Marriage was entered by this Court on April 8, 2006.
2. Pursuant to Final Judgment and the parties Marital Settlement Agreement, (attached hereto as Exhibit A) on page 3, paragraph 2, of the parties Marital Settlement Agreement it states: "The parties agree that hereafter they will not incur any debt in the other party's name or joint names." This is followed by an indemnification clause.
3. On page 4, paragraph 4, and continuing on to page 5 it states: "Once documents have been exchanged thereafter the party taking sole title shall solely own and be responsible for the respective parcels transferred to that party."
4. On page 4, paragraph 3, it states: "The parties shall solely own all assets distributed to them on Exhibit A."
5. On Exhibit A attached to the Marital Settlement Agreement it states: "Wife is to receive the following property: 100% use, possession and ownership of the XX City home located at YYY Street."
The legal description of the home is as follows:
6. Comes now, the Former Wife, who is not current on mortgage payments on above described real property, has incurred additional debt on behalf of the Former Husband whose name is also on the note and the mortgage documents. This is contrary to the intent of the Marital Settlement Agreement and Final Judgment. The lender, Bank of America, has offered the Former Husband a deed in lieu of foreclosure, but the Former Wife refuses to give the deed over to the Bank of America; she is vindictively motivated and has told Former Husband she hopes the home goes into foreclosure, ruining the credit ability of the Former Husband. Bank of America has placed a deadline upon Former Husband of November 20, 2010. Property must be vacated, turn over the deed and execute all necessary documents. Former Wife must comply with all demands stated herein.
WHEREFORE, FORMER HUSBAND respectfully asks this court for the following relief:
1. Enter an order compelling the Former Wife to timely comply with necessary actions to effectuate a deed in lieu of foreclosure compliance as required by Bank of America.
2. Or in the alternative, because of her failure to cooperate, and the damage to Former Husband, appoint the Former Husband with a limited power of attorney to transfer the property and power to execute all documents required for a deed in lieu of foreclosure to Bank of America.
As you can see, the husband is trying to salvage a potential additional liability that was never intended in the marital settlement agreement nor the court order granting the divorce. The current motion is having to sew together a quilt of rights of the husband from different pieces of the marital settlement agreement. There was no direct language in it that provided a remedy for this type of situation.
Careful drafting and consideration of a difficult real estate market requires new ways to accomplish a successful, long term and equitable distribution of marital assets.
Copyright 2010 Richard P. Zaretsky, Esq.
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 email: RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com.
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