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Dealing with a past-due mortgage during divorce

In past weeks, we discussed the protections that bankruptcy can afford homeowners. Filing bankruptcy can help you stop a foreclosure, especially if you file a Chapter 13 bankruptcy and follow through with a repayment plan. But what happens if you are considering divorce or are in the middle of divorce?

If divorce is imminent, then you probably don't want to commit to a three to five year payment plan based on your current joint income and marital expenses. What you decide to do in such a situation depends on a variety of factors, including income and debts and how you plan to treat the house in the divorce.

If you are planning to sell the house and split any possible proceeds, then you might consider just selling the house now, especially if the bank will agree to this action. If the house is worth more than you owe and you receive that amount from the buyer, then you can pay off the mortgage and split any remaining funds as assets in the divorce. If the house is worth less than you owe, then you might have to sell short and split the remaining debt in the divorce. Some banks will work with homeowners to short sell the home and will not seek the additional payments, though.

If these options aren't possible or you have other debts to take care of, you could both file Chapter 7 bankruptcy prior to divorce. You'll have to make sure you meet the income and debt requirements for filing, but once you file and complete the bankruptcy, your included debts are discharged. This can be especially helpful for those who want a truly clean start.

While bankruptcy will stay on your credit record for a number of years, so will any financial issues that often follow divorce. Working with a bankruptcy attorney helps you understand your options and which steps best protect your interests.

Source: Bankrate, "Which to file first: Divorce or bankruptcy?," Justin Harelik, accessed June 03, 2016

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