Short sale of home owned by divorced couple creates legal complications
Friends of mine who were married got divorced and he kept the house. Later, the home went into a short sale. Both of their names were still on the mortgage but only the husband lived in the house at the time.
Now the ex-spouse who did not live in the home is trying to claim half of the $10,000 relocation incentive offered by the short sale lender. Should that spouse be entitled to receive any of that money? They had been divorced for five years before it went to short sale.
That’s an interesting question that may not have an easy answer. You see, the husband and his ex-spouse took out a mortgage with this lender. If both of their names were still on the mortgage at the time the property was sold in a short sale, both of their credit histories have likely been affected by the short sale. That’s because the lender is not getting paid all that it is owed on the mortgage on the home.
You also have to consider the divorce decree and what it said. We don’t know if the divorce decree settled who was to own the house going forward. Just because the lender names the $10,000 payment a “relocation assistance payment,” doesn’t mean that the owner of the home must use it for that purpose. The $10,000 given by lenders to their borrowers is an incentive to the owners with the hope that they leave the home intact and that the sale to the buyer goes through with few problems. There have been multiple instances reported where sellers have trashed their own homes before those homes have been foreclosed or sold in a short sale.
Read also 5 ways to lower your tax bill
If the $10,000 is considered a cash payment, that payment could be shared by the owners of the home. If your friends were married and lived in the home, the answer would be easy: They could share it equally. Now if the divorce decree gave the home to the spouse living in the home and made that spouse solely responsible for the repayment of the loan and all other items between the two ex-spouses have been settled, the spouse that received the home and is now selling the home should keep the money.
If the ex-spouse who does not live in the home is owed money or still co-owns the home, only then do we think some of the money from the sale should go to that individual. It would seem to us that the resolution to this issue would be the same if the seller of the home was not selling in a short sale and was receiving $10,000 from that sale. Why would the ex-spouse get any of the money from the sale unless the divorce decree granted that person some of the proceeds?
(Of course, if the ex-spouse assumed that the husband would make payments on time and protect the ex-spouse’s credit, and the husband did not, then the ex-spouse might be entitled to more of that cash for damages.)
Your friends will need to work it out — if they can’t, they will need to talk to their divorce attorneys and settle it by other means. At issue is that the sale is probably imminent and the ex-spouse who wants a part of the money is threatening not to sign documents without receiving some payment. The person selling is in a bind and doesn’t have the luxury of time. He may need to offer something to get the sale to move forward. We hope they are able to work it out amicably, but who knows?