There are numerous options for dealing with foreclosure during divorce.
Seek a Loan Modification or Refinance the House
Does one of the parties in the divorce want to stay in the property that is at risk of foreclosure? Depending on the separate property and financial assets of each party, it may be possible to refinance the home or to obtain a loan modification. Refinancing the house—and getting a better interest rate with lower monthly payments—would require that at least one of the parties has strong enough credit to refinance the loan on the property. When you refinance, you essentially pay off the old loan and get a new one, hopefully with better terms.
If refinancing is not a possibility, then the party who wants to stay in the house may be able to obtain a loan modification. A loan modification can also reduce the interest rate, but in general it will alter the terms of the mortgage to make monthly payments more affordable. If, however, a loan modification is not an option and you cannot refinance, you may need to try to sell the property.
Selling the House and Short Sale Options
If the house has some value, it may be best for the parties to sell the property. If the house has no equity, or worse, if it is underwater, then selling the property might only result in bigger burdens for the divorcing parties. One option could be a short sale. In a short sale situation, the home is usually underwater, which means the homeowners owe more on the loan than the house is worth. In these cases, the lender may agree to accept the sale price of the home (even if it is less than what the debtors owe) and agree to forgive the remaining debt. Short sales are technical and the advice of a real estate attorney should be obtained.
If neither a general sale nor short sale is possible, the parties may have to consider a deed in lieu of foreclosure. In effect, the homeowners sign over the house to the lender “in lieu of” a foreclosure. In other words, the homeowners transfer ownership to the mortgage company so that a foreclosure does not happen. Sometimes lenders want to recover the amount the homeowners owe, but a lawyer can negotiate a “deed in lieu” that benefits you.