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EX Husband Bankruptcy/Mortgage?

My girlfriend's X is a real deadbeat. Last week, she got a 1099-C from a bank that he had borrowed from to buy a car, failed to pay off, and they had apparently discharged the loan, sending my GF the 1099-C because she co-signed the note. She took it to her CPA and she inquired if my GF's X was planning to declare bankruptcy. My GF didn't know so she inquired and her X responded with a "not yet", perhaps implying that one is in the works.

So, here's the question: During the divorce, my GF was awarded the house they had lived in. Frankly, the house had been deeded to her several years before that my her X because he borrowed a large amount of money from her 401K and she wanted something to secure it. In the end, he lost every penny of her money trying to flip houses. None the less, fast forward to the divorce. The deed is in her name alone, but the mortgage and an equity loan taken against the mortgage are still in her X's name. My GF has been paying these two loans for almost 3 years now, always on time, for more than the monthly service and she has gotten rid of all the arrears her X had built up on it. As I mentioned, in the divorce, the judge confirmed award of the house to her and gave her three years to refinance the house out of his name. It's now been about a 2 years.

Ok, finally, here's the question really: If her X now files for bankruptcy, can the bank immediately call in the notes and force my GF to pay it all off or face foreclosure? She is still rebuilding her credit and needs the extra year to really make sure that she can refinance with her bank and to get a good rate.

A few added notes: She did file a claim on the house under the MA homestead act. She was never a signatory to any of the debts accrued by her X husband and is not obligated to pay any of them under the divorce agreement. We have read some information that seems to indicate that the bank is not obligated to foreclose if the note is current and being paid, but also made it sound like it might be discretionary on the bank's part. We also read some information that seems to indicate that you can exempt the house if it's a homestead under MA law, but since my GF isn't filing for bankruptcy and her X is, how is she affected?

Complicated, but thanks for your help.

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Submitted Tue, 02/10/2015 - 15:09

This is an issue we come across all the time, people believe that if they cosign a loan or a mortgage that they are simply helping the other person by the piece of property by using their credit score, this is not the case, in fact you are obligated to pay the note. So if the primary person is actually purchasing the property file bankruptcy and discharges the debt, the cosigner must pay for the debt and deal with any tax ramifications that come from this. In the situation you're discussing a car loan, so if the bank sells the car at auction and only gets $2500 for a car they have a loan of $5000, you will get an IRS 1099 for $2500 for that calendar year. There is really nothing you can do, as you signed a contract stating that you were the cold borrower, it wasn't simply that you are giving a good credit score, you are promising to pay if the person you signing for failed to make payments and you're also responsible for any tax ramifications that come from the auctioning of the car. The same thing goes true for someone who cosigned on mortgage.

Thanks for your response Joe. She's all good with the car note and I'm sure understood the ramifications when she cosigned for the loan. The bank has discharged that and she's dealing with her CPA regarding the tax implications. The bigger question was regarding the mortgage and equity loans on the house. Her X deeded the house to her many years ago (2009) and the divorce court confirmed award of the house to her alone during that proceeding two years ago. The mortgage on the house and an equity loan taken against it are still in her X husband's name. The court gave her three years to refinance it herself. She's working on that. She's concerned now, however, that if he files for bankruptcy, the bank may call in the note before she can refinance. Can they? The mortgage and equity loans are all up to date. They were in arrears when he left the home, but since then she has caught them both up and pays them on time for more than the monthly amount each month.

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