When a jointly owned property carries joint debts – mortgages, loans or other financial obligations – dissolution must address these debts before or alongside the division of any equity. The rights of creditors must be respected throughout the process.
Types of Joint Debts in Property Partnerships
Common joint debts on shared properties include: joint mortgage loans taken to purchase the property, construction or renovation loans, lines of credit secured by the property, and judgment debts or attachments registered against the property.
Each type of debt has different characteristics and requires different handling in dissolution proceedings.
The Mortgage Lender’s Rights
A mortgage lender has a secured interest in the property that must be addressed before the partners can divide any proceeds. The dissolution cannot simply ignore the mortgage – either it must be paid off from sale proceeds, assumed by one partner, or otherwise satisfied.
Partner Responsibility for Joint Debts
When partners took out loans jointly, each partner is typically personally liable for the full amount of the debt, not just their proportional share. This means if one partner cannot pay their share, the other may be required to cover the entire obligation.
Dissolution must address the allocation of joint debt obligations between the partners, and obtain releases of personal liability where possible.
Selling a Property with Outstanding Debts
When a property is sold in dissolution proceedings, the sale proceeds first satisfy secured creditors (mortgage lenders), then unsecured creditors, with any remainder distributed to the partners. If the property has negative equity, the partners may receive nothing and may still owe money.
Negotiating with Creditors
When dissolution is complicated by significant debts, negotiating with creditors may be necessary before proceeding. Lenders may agree to modify loan terms, release one partner from personal liability, or accept a short sale in appropriate circumstances.
An attorney experienced in both property and debt law can navigate these negotiations effectively.
