Promissory Note Advice

A divorced couple should sign a promissory note for the full amount owed. If one ex won’t sign, that partner should quit claim the interest.

Q: I have heard you speak many times on WGN radio and last year you were kind enough to respond to an email question regarding foreclosures.

Here is another true life situation and your input would be very helpful to my husband and me.

Our son is a contractor. He was doing well and built a huge new home a few years back.

But with the economy and the construction industry falling apart, so did his jobs. He is working minimally now, and my husband and I have been making their house payment for the past 2 1/2 years.

Currently they owe us approximately $50,000. We were afraid to allow the house to go into foreclosure, as they had, and still have, some equity in the house. We heard banks evict people when they are not “underwater.” It has been a financial burden on us as the payment is $1,700 per month, and we are retired on fixed incomes. But we couldn’t let our grandchildren wind up on the street.

The house has been listed for sale and even with finally lowering the price of the property, the home still has not sold. He and his wife are now divorced, although she is on both the mortgage and the title. She is willing to sign a quit claim deed to my son for her share of the property. Our son wants to put my husband on the title of the house, in case anything happens to him, the equity will go to his father and not his ex-wife.

We wrote out a promissory agreement for repayment of the money paid to help them out, but only our son signed it, stating that the ex-wife was not responsible for the debt if she quit claims the house away. Is this true? We lent the money to both of them.

If the property sells, will they automatically cut a check to repay us? Will my husband be responsible for any additional costs if he is on the title? We just don’t know what to do, and I thought of you. Is there any advice you can pass on to us?

A: Thanks for your email. I’m so sorry your son and his family have fallen on hard times. Worse, he and his wife have divorced, no doubt in part due to the immense financial strain.

Let’s clear up some of the confusion. When you quit claim your interest in a piece of real estate to someone else, you still are responsible for the mortgage you signed. The only way you would not be legally responsible for the loan papers you signed is if you refinanced the property and the original debt is paid off. Getting rid of the home doesn’t extinguish the debt.

Quit claiming the property to your son is a bad move on the wife’s part. She will no longer own any piece of the property but will still be on the hook for the full amount of the mortgage, not just half. This would be true even if a divorce judge ordered her to quit claim and said in the divorce decree that she is no longer responsible. She signed the paperwork and the lender can still seek repayment from her.

As for adding you or your husband to the title (and we think it should be both of you, not just your husband), that would be fine, except if the house goes into foreclosure there may not be any equity to salvage. It will be eaten up by attorney’s fees and filing fees and other cost of the foreclosure.

Frankly, if your son is divorced, he can sign a will designating you or your husband to inherit the home. He could also set up a living trust and put title of the home into the trust. Once the home is in the living trust, he could designate you or your husband as the future owners of the home.

Let’s assume there is equity. Being on title only would not obligate your husband to repay the mortgage, though that is what you have been doing. However, if your son stops making property tax payments, the house could be sold for back taxes. We could imagine a situation in which your husband is a part-owner of the home and real estate taxes aren’t paid on the home. In that instance, it’s possible that your husband’s credit could be hurt by being associated with the non-payment of the taxes on a home he owns.

I understand that your son owes you and your husband a lot of money. What he and his ex-wife should do is sign a promissory note for the full amount owed. If the ex-wife won’t sign (which she may not do because then she’d be on the hook for it), then have her quit claim her interest in the property to your son, and he can sign for the full amount, using the property as collateral.

You should have an attorney draft up the agreement to make sure your interest in the property is secure, and then make sure you file the mortgage with the local recorder of deeds office or other appropriate office, which puts the world on notice as to your claim.

By documenting the loan and having your son (or your son and his former wife) sign the documents, you might be able to get some of the money back when the home is sold. If the home can be sold for more than what is owed to the bank and covers other closing expenses, you could see some money come back from the sale.

Keep in mind that if the home sells for less than what is owed on it now, you won’t get anything back. You and your son should try to assess the true value of the home. The home is listed for sale but there are no buyers which tells us the home is listed for a price that is too high for the current market. If you have a more realistic view of the value of the home, you can assess whether you would ever recover the money they owe you from the sale of the home.

It’s quite possible that you won’t see this money again. The real issue for you is how you can stop the $1,700 per month drain on your cash flow. What your son needs to do is figure out whether he is going to be able to afford this property in the very near future and if not, start to formulate an exit strategy that includes selling at whatever price necessary and getting out.

While that may not help you recover the $50,000, at least it will plug the $1,700 per month leak and at this point, that may be enough.

Hope this helps. Good luck.


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