Thursday, February 28, 2008

What happens during a divorce if a community home is about to be foreclosed or has already been foreclosed?

With Arizona’s (and the rest of the country’s) current depressed real estate market, many people are facing foreclosures. A few things to keep in mind:

1. The foreclosure is going to continue on in most divorce circumstances unless the home’s mortgage is brought current, along with the reasonable costs associated with the foreclosure, such as attorney fees.

2. Arizona has an anti-deficiency statute that is going to apply in the majority of cases involving standard mortgages. Thus, Arizona law offers protection to homeowners whose home has been foreclosed. This statute, A.R.S. §33-729, states as follows:

33-729. Purchase money mortgage; limitation on liability

A. Except as provided in subsection B, if a mortgage is given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price, of a parcel of real property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling, the lien of judgment in an action to foreclose such mortgage shall not extend to any other property of the judgment debtor, nor may general execution be issued against the judgment debtor to enforce such judgment, and if the proceeds of the mortgaged real property sold under special execution are insufficient to satisfy the judgment, the judgment may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary.
B. The balance due on a mortgage foreclosure judgment after sale of the mortgaged property shall constitute a lien against other property of the judgment debtor, general execution may be issued thereon, and the judgment may be otherwise satisfied out of other property of the judgment debtor, if the court determines, after sale upon special execution and upon written application and such notice to the judgment debtor as the court may require, that the sale price was less than the amount of the judgment because of diminution in the value of such real property while such property was in the ownership, possession, or control of the judgment debtor because of voluntary waste committed or permitted by the judgment debtor, not to exceed the amount of diminution in value as determined by such court.

Interpreted, this statute means that for the average homeowner, a lender cannot seek to recover from the homeowner any shortages when the foreclosing bank sells the house for less than the outstanding mortgage amount. The second part of the statute is interesting, but reasonable, in that it references voluntary waste –if, for example, a homeowner angry at the foreclosing bank wrecks his/her home intentionally, the homeowner may be responsible for the effect the damage has on the home’s value.

So what options does a homeowner have in a divorce situation or otherwise? Here are a few:

1. Let the bank foreclose on the property. The foreclosure in most circumstances will absolve the homeowner from most or all further financial responsibilities but will not reflect well on the homeowner’s credit report. Consult an attorney regarding your specific situation prior to assuming that there will be minor or no financial repercussions as there are exceptions to the anti-deficiency provisions of A.R.S. § 33-729. If there are negative financial repercussions, community property principles apply and if a divorce situation exists, then the parties or court will decide the parties responsibility for the financial obligations. Of course, any divorce rulings define the rights and obligations as between the parties only and are not binding on third party creditors, such as mortgage holders, meaning that banks are free to go after both parties if community property/obligations are involved.

2. Bring the mortgage current and retain the property. The homeowner will have to pay additional fees/costs to do so but then will continue to own the property.

3. Consider a “short sale” which is an effort to sell the property at a reduced price so that the bank will not have to bother with the time and expense of foreclosure. The bank then accepts the buy-out, basically, with less negative effects on the homeowner. It’s more complex than that but that’s the gist. I recommend that a lawyer guide both the seller and buyer of anyone participating in a short sale situation; as well, a good real estate agent familiar with short sales is recommended. Of course, when the real estate market is better than it is at the time of this writing, selling a house and paying off the mortgage in full is easier than it is now. In addition, some lenders will not agree to short sales because they believe it sets a bad precedent that too many other borrowers will attempt to use. Another piece of the short sale puzzle is the possibility the IRS will consider any amounts forgiven as income (consult an attorney regarding the Mortgage Forgiveness Debt Relief Act of 2007 for specifics on that new law and related consequences).

Real estate issues are complex and real property is often the largest asset involved in a divorce. It’s a good idea to consult with a competent attorney prior to making decisions about real estate!

Wilcox Legal Group, P.C.
Carrie M. Wilcox, Esq.
For the Firm

Phoenix office:
3030 N. Central Ave., Ste. 705
Phoenix, Arizona 85012
Ph: 602-631-9555
Fx: 602-631-4004

Goodyear office:
1616 N. Litchfield Rd., Ste. 240
Goodyear, Arizona 85338
Ph: 623-344-7880
Fx: 602-631-4004

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Disclaimer: Providing the above information does not establish an
attorney-client relationship. To create such a relationship, both the
attorney and potential client must sign a written fee agreement. The
information contained herein is meant only as general information and is not meant to be relied upon for the purpose of taking legal action. You should contact an attorney in person for further and specific information. Wilcox & Wilcox, P.C. attorneys are licensed in Arizona only except for personal injury attorney Robert N. Edwards, who is licensed in Arizona and Minnesota.

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