If you are filing for bankruptcy post-divorce and you owned a home during your marriage…we’ve got both good and bad news for you.
If a Home Equity Line of Credit (“HELOC”) is included in a Chapter 7 bankruptcy, the liability on that HELOC is gone once a discharge notice is received. That’s good news.
In regard to a HELOC loan, there is such a thing as a reaffirmation agreement which is a legally enforceable contract filed with the bankruptcy court. This agreement states your promise to repay all or a portion of a debt that may otherwise have been subject to discharge in your bankruptcy case. Liability on the loan is reestablished when this agreement is attached to your bankruptcy.
No reaffirmation of the loan also means that any future HELOC payments made will not be reported on your credit report. A foreclosure presents a different situation though. Even though the lender is not allowed to report any late payments, they can definitely report a foreclosure (the bad news). Unfortunately, neither the bankruptcy nor the divorce removes your name from the loan. The lender is not obligated to remove your name from the loan since you don’t want to pay on it anymore or agreed to give the house to your ex, etc.
A home mortgage, when owned by one spouse according to the marital settlement agreement, does not prevent the lender from coming after you as the co-signer on the loan. The marital settlement agreement would allow you to make your ex-spouse pay in the event that the lender tried to sue you, but the agreement alone will not protect you from all negative association with the loan; bankruptcy is necessary for liability protection.
Try to think of it like this: what does bankruptcy do for you? And what does bankruptcy NOT do for you? While the bankruptcy wiped out your liability (the good news), a bankruptcy does not require the lender to take your name off of the loan (the bad news). There is only one way to get your name off the loan and that is for your ex-spouse to refinance the property.
If you have additional questions regarding filing for bankruptcy and how that will affect your debt according to the marital settlement agreement already in place, please get in touch with the southern California bankruptcy attorneys at Westgate Law.