Divorce Debt: Why a Quitclaim Deed Won’t Save You from Mortgage and Bankruptcy Issues

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

The Quit Claim Deed Trap: In a divorce case,  mortgage debt and subsequent bankruptcy is an issue I frequently address in my practice. With rising interest rates making refinances difficult, divorcing couples are facing unprecedented risk, especially regarding the marital home.

Most clients I consult with assume a Quit Claim Deed severs all ties to the marital home. That assumption is dangerously wrong. The grim reality: a Quitclaim Deed does not eliminate your responsibility to the mortgage lender. If your former spouse falls behind, you can be sued, your credit can be ruined, and you may be forced into bankruptcy, even years after the divorce is final.

Listen: The Professor’s Audio Briefing.

Key Points on Mortgages and Quit Claim Deeds

• Quitclaim Deed is Not a Release: A quitclaim deed only transfers ownership of the property; it does not relieve the spouse who moved out of their legal responsibility (lender liability) for the mortgage debt.
• The Bankruptcy Ripple Effect: If the spouse remaining in the home files for bankruptcy, the spouse who moved out can still be pursued by the mortgage lender and may be financially forced into filing for their own bankruptcy.
• Refinance is the Only True Clean Break: Due to rising interest rates, refinancing the mortgage in the remaining spouse’s name alone is often unaffordable, yet it remains the only secure method to remove the other spouse’s liability entirely.

The COVID-19 Effect on Mortgages

The economic whiplash from 2020 to today, from record-low interest rates to the current high rates intended to combat inflation, has created a financial trap for divorcing couples: affordability.

The Financial Impact of Refinancing

• A $300,000 mortgage at the peak low rate (around $2.72%) had a principal and interest payment of approximately $1,220 per month.
• The same $300,000 mortgage at today’s rates could cost close to $2,016 per month.

This massive increase means the spouse staying in the home now needs an extra $796 per month just to cover the loan. They must also take on an additional amount to pay off the co-signer spouse’s equity (e.g., $50,000), making the new mortgage even larger.

• How Falling Mortgage Rates Can Save You Thousands: Is Now the Time to Buy or Refinance?

In many cases, the spouse who wishes to keep the home simply cannot qualify for a new, larger loan at the current high rates. This forces the couple to seek a risky alternative that keeps both names on the original mortgage.

The Legal Danger of Shared Liability

When a divorce is filed, the standard options are to sell the house or have one spouse buy out the other’s equity. If a buyout is attempted without a complete refinance, here is the critical danger:

How Bankruptcy Affects Divorce Proceedings

1. The Quit Claim Deed Myth

A quit claim deed transfers your ownership interest in the property to your former spouse. It satisfies the terms of your divorce agreement, but it does not satisfy your loan contract with the bank. You are essentially giving up your right to live in the home while retaining all the lender liability for the debt.

2. The Foreclosure and Credit Shock

If the spouse who stayed in the home misses mortgage payments, both parties, the one living there and the one who left years ago, will be sued in a foreclosure action. The late payments will negatively affect both credit reports, potentially preventing the separated spouse from qualifying for future loans like a new car loan or a mortgage on their own new home.

3. The Bankruptcy Ripple Effect

The gravest risk arises when the spouse who stays in the home files for bankruptcy. Even if you haven’t lived there for years, the mortgage lender will still pursue you, the non-debtor spouse, because your name remains on the original note. This can force you into a financial crisis where filing for Chapter 7 or Chapter 13 bankruptcy becomes your only recourse.

4. Qualifying for New Loans

Credit Report Liability: Remaining on the old mortgage significantly impacts your debt-to-income (DTI) ratio, making it much more difficult or impossible to qualify for a new mortgage, a car loan, or other forms of credit.

The Professor’s Advice: Insist on a Clean Break

As I advise my clients, the goal in any divorce involving a mortgage must be a clean break.

Allowing a spouse to remain on the loan, even out of goodwill or to allow a parent to stay until a child turns 18, is an unpredictable financial liability. The inability to predict future job loss, health issues, or economic downturns means that risk is too great to bear.

For your own financial safety and your ability to qualify for loans in the future, a complete refinance that removes your name from the mortgage is the only dependable solution. Do not settle for less.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.