For many, divorce seems to lead to bankruptcy. We’re not marriage counselors or divorce experts so we can’t really say if the prevalent number of bankruptcies after divorce is due to the divorce or if the divorce is due to the need for bankruptcy. Regardless, many find themselves dealing with both in a short period of time. Dealing with both can lead to some issues specific to the difficult combination of bankruptcy & divorce.
One such issue is in relation to the family home, or more importantly, the home loan. Divorce typically results in separation of the married couple. In most cases, one stays in the previously joint residence and the other leaves to find other accommodations. When this occurs and the individual not living in the property files for bankruptcy (including the mortgage on the property) there can be additional issues that crop up later due to the joint ownership on the property.
Your ex stayed in the property for a few months while looking for another place to live. You assume that by filing bankruptcy and receiving a discharge of your mortgage, the debt is no longer your responsibility (and falls on your ex exclusively). Months later you receive a request from your ex that you sign what is called a deed in lieu of foreclosure. What is it? Should you sign it? Is it necessary? Is it going to hurt you after you’ve already filed bankruptcy?
In this situation, your liability on the mortgage has been eliminated by the bankruptcy discharge. The only exception would be if you reaffirmed your mortgage loan while your bankruptcy case was active. Receiving the discharge of your mortgage loan means that the lender can no longer come after you for payment on the unpaid mortgage balance. It also means that the county cannot come after you for unpaid property taxes and that the insurance company cannot come after you for unpaid homeowner insurance premiums.
If your ex is requesting that you sign deed in lieu of foreclosure; it’s for a different reason. It won’t change any of the above facts regarding your bankruptcy discharge and your mortgage.
Signing a deed in lieu of foreclosure relinquishes the title of the house back to the lender prior to foreclosure. It’s a method of speeding up the process of returning the property to the lender and getting it out of your name. Most lenders aren’t willing to accept a deed in lieu of foreclosure, but if they are, it’s only to your benefit. The foreclosure process is very rarely quick. In some cases, it can take years to complete. Utilizing the deed in lieu of foreclosure to transfer the title back to the lender (and out of your name) without waiting on the foreclosure process means you can begin the credit recovery process that much quicker. For instance, most lenders will generally expect you to wait 2 years from the date of a previous foreclosure before attempting to purchase another home. If the lender is willing to accept a deed in lieu of foreclosure, they are basically offering you the opportunity to get started on your 2-year waiting period immediately.