How to deal with a joint mortgage in a separation? – Real-life case

The breakup of a couple can be painful in many ways. Aside from the emotional aspect of grieving a relationship and the fears associated with starting anew, financial uncertainties can weigh heavily when a couple separates. Pierre Fortin, President and Licensed Insolvency Trustee at Jean Fortin & Associés, presents the case of Charlotte and Derek** who don’t know how to deal with their mortgage loan in light of their separation.

Charlotte and Derek, who, after having been together for only one year, made the big decision to buy a house together. Things were great for a few months, but a little over a year later, their relationship started to falter.

By March, separation seemed imminent.

What are the main financial concerns during a separation?

• Joint debts: How to separate them?
• How to fairly divide assets?
• Is it possible to move out on a limited budget?
• How to reduce personal expenses during a separation?

For Charlotte and Derek, the burning question was: what to do with the house they purchased for $390,000 with a minimal down payment of 5%? Despite their stable careers – Charlotte as a physiotherapist and Derek as a carpenter – neither of them could individually bear the burden of the monthly mortgage payment. The prospect of one of them moving out and the other keeping the house would have been ideal, but is it financially feasible? The house, once their dream, had now become a golden cage.

If this situation resonates with you and you would like to discuss it with a financial advisor, we invite you to book an appointment or ask your questions now. We also recommend continuing to read this article to learn about the solutions offered to Charlotte and Derek to free themselves from their joint mortgage debt as well as their decision.

What solutions are proposed by the bank for a mortgage when a couple separates?

When a person decides to hand over the keys to their property to their financial institution, the bank has two choices. Firstly, the institution can ask the court to be declared the owner and sell the property. This process is called foreclosure. In this case, the borrower is relieved of their debt. If there is a loss, the bank will assume it and if there is a profit, it belongs to the bank. Given the recent purchase and financing at 95% of the value, the chances for a profit are slim. Therefore, this would by far be the best solution for Charlotte and Derek.

The second option for the financial institution is a sale under court control. In this option, the institution forces the sale of the house through a real estate agent. The entire process is supervised by the court to protect the rights of both parties. In this scenario, if the institution sells the house at a profit, it belongs to the borrower. However, if they incur a loss, the borrower is responsible for the loss. Charlotte and Derek’s bank had opted for this option, which was clearly less advantageous for the couple.

What to do when the solutions proposed by the bank are not suitable?

In search of a solution, they consulted a specialist in financial restructuring. Quickly, a personal financial advisor from Jean Fortin took the time to analyze Charlotte’s and Derek’s financial situation to get a clear picture of their assets, their debts and their budget. This is an essential step to determine all possible solutions to their indebtedness.

The couple both have leased cars and each have approximately $2,500 of credit card debt. They had also taken out a $10,000 loan to furnish their new home. Pierre Fortin explains that handing over the keys to the financial institution entails implications for the owners.

What financial solution did this separated couple choose?

After careful review, the advisor estimated that the forced sale of the home could incur approximately $27,000. An amount that Charlotte and Derek could not cover. To avoid being forced to live together during legal proceedings and the sale of the house (sometimes can last more than a year), they chose to hand over the keys to their bank and make a consumer proposal for their personal debts as well as the potential loss that the bank would likely incur.

“Based on their income, a proposal of $12,000 each, payable over 60 monthly payments of $200, made sense for their creditors and was more attractive than bankruptcy,” notes Pierre Fortin.

By negotiating the loss on the house and other debts in advance and at a reduced rate, the couple minimized the damages. They were able to leave the house, avoiding continued mortgage payments and being obliged to live under the same roof.

Some financial advice during a separation:

• Keep your budget up to date: You can analyze your personal finances and better prepare yourself for a fresh start.
• Actively seek quick solutions for a smooth transition: Even in an amicable separation, forced cohabitation can lead to discord and bitter disputes.
• Avoid financial institutions’ foreclosure: Financial institutions tend to opt for court-controlled forced sales as creditors, which rarely results in as high a selling price as you would get if you sold it yourself. A loss is therefore often to be expected in the case of foreclosure, and you will always be responsible for any loss..
• Consult professionals before legal proceedings are initiated: It is always better to prevent than to cure.

By Pierre Fortin
Jean Fortin & Associés
Personal Finance Advisor
Licensed Insolvency Trustee

**Names have been changed to protect the anonymity of individuals.