I see this common mistake occur in the divorce process all too often. A husband and wife decide to handle their divorce without the assistance of an attorney. One party offers the marital home to the other party as a condition of the divorce. Sometimes the parties will even execute a quit claim deed accordingly, and go their separate ways thinking everything was done properly.
In the future, the party who took the house as part of the divorce may have financial difficulties and default on the mortgage. Then out of the blue BOTH parties are served with foreclosure papers. The party that signed over the house mistakenly believes that the divorce judgment will offer protection against the foreclosure and they are shocked when they are informed that it does NOT in fact offer any protection against the foreclosure.
What most people don’t understand is that the promissory note is the instrument that obligates them to the debt incurred for the home. If both husband and wife have signed the promissory note then the terms of the divorce decree do not cancel this obligation. What I typically do in the divorces that I handle is require the party receiving the home to “refinance” the home in their name alone. If the party receiving the home cannot successfully complete the refinancing process within a given period of time or if they default on the mortgage, then they are required to sell the home and equitably split any proceeds.
Remember, a foreclosure can sink a credit score and even worse, if the foreclosure results in a deficiency judgment (shortage that must be paid by the homeowners), the bank can come after both parties on the promissory note for this deficiency. It’s sad to see one party who believed that he/she was doing everything by the book wind up getting their credit score decimated and possibly facing the need to file bankruptcy all for a simple mistake which could have been avoided had they had proper legal counsel.