I frequently hear from clients and prospective clients telling me that they have “rearranged” their financial affairs through the use of so-called “quitclaim deeds” or other contractual mechanisms by which title to property–and by extension–liability for a mortgage, is transferred.  The most common appearance of this tends to be in the marital dissolution and property settlement context, where two divorcing spouses have divided the marital assets by “giving” property to each other, and one or the other has “assumed” liability for the mortgage. In concept this is a great idea.  In reality, however, if there is a mortgage, it’s not all that useful.  In fact, it is usually pointless.

This is simply because the lender’s rights are fixed as of the time of execution of the loan documentation, and the borrower can’t get out from under a repayment obligation simply by deeding the property to someone else. I won’t bore you with the legal language that is usually contained in the deed of trust, but suffice to say that, once on a loan, always on a loan until the loan is repaid or the lender specifically releases the borrower from the liability. Further, as a general legal principle, the loan obligation follows the property no matter who is on title.

An example might be in the case where the family owns two houses, a primary residence and a rental property, both of which are subject to mortgages, and both of which have both spouses’ names on title.  When they divorce, the husband takes one and the wife takes the other as part of the marital property settlement. That’s great as long as the mortgages are being repaid. But if one of the parties gets into financial trouble, it will not be possible to inoculate the other from the consequences of a bankruptcy or default, because both parties are on the loans. Once on a loan, always on a loan until the loan is repaid or the lender specifically releases the borrower from the liability.

Of course this doesn’t mean that there aren’t solutions, but the quitclaim deed and assignment without the lenders’ consent are not real solutions.

6 Responses to Quitclaim Deeds, Mortgages and Bankruptcy

  1. Great info! I recently came across your blog and have been reading along. I thought I would leave my first comment.

  2. I have been checking out your blog for the last couple of hours, and everything has been very informative and well written.

  3. strscream says:

    Very shorts, simple and easy to understand, bet some more comments from your side would be great

  4. Well, the whole blog is my “comment.” If there are specific questions to respond to I do, but I don’t get much in the way of that.

  5. bobbieyomama says:

    You say ther loan obligation follows the property…..
    We sold our residence in 2007…the buyer took over the loan “subject to” the existing deed of trust…made payments on same, took write off on same…until Sept 2010..at which time he let it be foreclosed.. we received a 1099A…is this the responsibility of the buyer?

  6. You haven’t read the whole post. “…the lender’s rights are fixed as of the time of execution of the loan documentation, and the borrower can’t get out from under a repayment obligation simply by deeding the property to someone else…”

    If I had to guess, I’d say that the bank didn’t substitute you out, nor accept your buyer in lieu of you on the loan. Yes, the new “owner” takes the property subject to the security and loan, but that doesn’t mean that the original borrower is off the hook. All that means is that if the loan isn’t paid, the property can still be foreclosed on.

    You can’t discharge a loan by transferring the security.



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