There are many things to consider when making major life decisions like filing for bankruptcy, especially in the midst of, or an impending divorce. Protecting your credit is very important during this time for your financial freedom in the future.
If your name is on the mortgage loan and you are afraid of future liability it is wise to resolve as many issues in a legal way before filing for a divorce. You wouldn’t want any divorce issues to impact your request for the financial relief a bankruptcy can provide. You will need your soon-to-be ex’s cooperation if you want to protect your credit as much as you can from this point on. You both can avoid making your credit worse with a little cooperation. A foreclosure will show up on your credit after you file bankruptcy. After the bankruptcy, if you file late payments it will not be reported to the credit bureau, however the lender will report the foreclosure sale. There are some steps to follow to ensure a successful process.
- Confirm you would be liable to pay the mortgage. You need to make sure you will not be liable after the sale because of the laws of your state. A deficiency is the difference between what was owed and what the property was sold for at the foreclosure auction. Under anti-deficiency laws, if your mortgage was for the purchase of a property that you occupied, you will not be held responsible for any deficiency.
- Then, file for bankruptcy. Depending on your other debts you’ll need to make sure that you are eligible for Chapter 7 bankruptcy. If you are, it is best to wipe out your liability on the mortgage and on any other debt.
- File for a divorce. Once you have filed for bankruptcy and eliminated your debt do not agree to pay any of the joint debts that may be in your name. Since the bankruptcy wiped out your responsibility to pay back the debt, do not reestablish that liability by agreeing to pay on that debt in the divorce agreements.
- Sell your property. You are allowed to sell the property after filing for bankruptcy or divorce and you would do this before either process is complete. Since most of the time in these situations, there is little or no equity in the house, you will need to sell the property for less than what it is worth. This term is called a “short sale” and is better for your credit than a foreclosure.
A bankruptcy eliminates your liability on the house, a divorce ends your marriage and a short sale protects your credit as much as possible. The first two can be done without your husband’s cooperation. The last step cannot be done without your ex’s participation.
Please get in touch with one of the southern California bankruptcy attorneys at Westgate Law if you have any additional questions or concerns.