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USFN 25th Anniversary

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The Court Granted My Divorce, Now I Want My Name Off the Loan

by Lana Reagor
Barrett Daffin Frappier Turner & Engel, LLP - USFN Member (TX)

When a married couple purchases a home, a lender normally requires a promissory note secured by a contemporaneously executed deed of trust. By signing the note, the maker of the note enters a contract to pay the instrument according to its terms. Likewise, the deed of trust is a contract binding the borrower to certain obligations that, if not fulfilled, allows the lender to foreclose on the property.

Texas is a community property state, which means, in most circumstances, both spouses have a one-half interest in all property acquired during the marriage, even if one of the spouses is not listed on the deed. Both spouses will be required to execute the deed of trust even if he or she is not on title to the property or purchasing the property because of the interest held in the property.

Complications arise and problems begin if the couple divorces. The Texas Family Code section 7.001 provides that the court shall divide the property between the parties “in a manner that the court deems just and right, having due regard for the rights of each party and any children of the marriage.” In most cases, the court will award the property to one of the spouses and the other will execute a deed conveying his or her interest in the property to the other spouse once that decree is finalized. Because the parties are represented by counsel and have conveyed any interest in the property, they are left with the assumption that the obligations with the lender have been terminated as well. This, in fact, is not true.

The court cannot alter the prior agreement between the lender and the couple as the lender is not a party to the divorce. Nor does the divorce decree change the terms of the note or alleviate the responsibilities of the borrowers under the deed of trust. Consequently, if the spouse that is awarded the property fails to maintain the obligations to the lender, the other spouse can be penalized by negative reports to the credit bureaus, foreclosure liability, and, possibly, can be sued for deficiency under the promissory note. The rights of the payee of a note secured by a deed of trust likewise cannot be diminished by the subsequent acts of the borrower. Thus, conveying ownership of the property is of no effect on the previous loan agreement.

When a divorce occurs, there are various ways to handle the disposition of the marital property to avoid the aforementioned unfortunate situation. If the divorce is pending (and both spouses have responsibilities to the lender), the divorce attorney should take measures to ensure that a client is adequately protected, especially if the client is deeding over interest in the property. One option is to require the spouse who is awarded the property to refinance the loan solely into his or her name within a certain time frame. A refinance will require the new, sole owner of the property to obtain new financing by signing a new promissory note and deed of trust in order to satisfy the note signed by both spouses and discharge the deed of trust signed during the marriage. Another option is to have the property-awarded spouse assume the loan. This means that the party who was awarded the property will assume all of the responsibilities to the lender while the other party is discharged from any liability to the lender. The lender must agree to an assumption.

If refinancing or assumption is not a viable option due to credit issues or other circumstances, the court may order that the property be sold. The divorce decree may require the property to be placed on the market within a certain time period and award the proceeds of the sale to a certain party or split between the parties as the court determines “just and right.” The couple may also seek short sale approval from the lender if they anticipate that the proceeds of the real estate sale are insufficient to pay the balance due to the lender. In a short sale, the lender will agree to discount the loan balance due in order to avoid foreclosure, assuming the short sale will result in a smaller financial loss than the foreclosure. The Texas Family Code authorizes the court to appoint a receiver to dispose of the property. The receiver is appointed by the court to manage the property per the direction of the court. The courts do not favor appointing receivers and will normally avoid doing so if there are alternate remedies.

If the divorce is final and the property is not addressed in the decree, the former spouses become tenants in common. The courts have a mandatory duty to order a division of the estate if the situation is brought to the court’s attention; however, a partition suit is the appropriate remedy if the decree fails to provide for the division of community property. Section 9.202(a) of the Texas Family Code provides that a subsequent suit must be filed within two years from the date that the former spouse refuses to recognize the existence of the other spouse’s ownership interest in the property and communicates that refusal to the former spouse.

Section 9.008 of the Texas Family Code states that a suit to clarify the divorce decree is appropriate if the property division is addressed in the divorce decree yet is vague as to the manner the division is to be carried out. The court has the power to render further orders to enforce the division of property made in the decree to assist in the implementation of or to clarify the prior order. Therefore, if the property is awarded in the decree yet no time limitation for refinance or sale of the property is specified, one can file a suit to clarify, requesting the sale or refinance of the property in order to extinguish the non-owner’s responsibilities on the loan. A clarification suit is not appropriate, and an order will not be enforceable, if it amends or alters the divorce decree in any manner. If, however, a divorce decree adequately addresses disposition of the property, one may file a motion to enforce the decree if its terms are not met. If a clarifying order has been granted, the court must allow a reasonable time for compliance before enforcing the clarifying order.

No one can predict whether a marriage will come to an end when purchasing a home with a spouse. Individuals rely on their attorneys to protect their interests in divorce proceedings. Employing an attorney knowledgeable as to these matters or bringing the matters to the attorney’s attention, if necessary, is extremely important in order to minimize the complications inherent in such an unfortunate situation.

In conclusion, when a lender or servicer receives a telephone call from a spouse/former spouse claiming that he or she no longer owns the property and, therefore, he or she should not be copied on notice, it is recommended that the person be referred to his or her divorce attorney for further clarification.

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