Dwyane Wade in Foreclosure?

2007 ESPY Awards - ArrivalsCould Dwyane Wade, worth approximately $100 million, really be in foreclosure? According to recent news reports, yes.  You may be thinking: What? Sure we hear about millionaire celebrities who live extravagant lifestyles only to end up in bankruptcy or lose a $25 million dollar home to foreclosure. But Wade is still making $30 million a year and the home in question is worth only $1.2 million (a pretty modest price tag for his income level).

So what gives?  Read a bit further into the story and you’ll get the explanation, which can be collapsed into one word — divorce. Wade’s situation is a lesson to anyone deciding what to do with the family home during divorce. Luckily for wealthy Wade, this situation is probably little more than a public relations fiasco for him. For the rest of us mortals who might be in a similar situation, it is a big deal and can be financially devastating.

Wade’s Property Settlement in His Divorce

Wade and his ex-wife, Siohvaughn Funchesreached a property settlement in their divorce last summer. She got the house in New Holland, Illinois. According to TMZ, Wade’s name was removed from the title to the home. But it sounds like his name is still on the home loan documents.

This is not unusual. When a home is awarded to one party in a divorce, it’s a fairly simple matter to drop one spouse’s name off the title to the home. Not so for the loan documents. Usually, the divorce judgment or settlement will state that the spouse who gets the home is solely responsible for making the mortgage payments. Even so, the parties cannot drop one spouse’s name from the loan documents. It’s up to the bank to do that. Because the bank has no incentive to remove one party’s responsibility for paying the mortgage, it rarely (if ever) does. Think about it. Why would the bank agree to give Wade a free pass on his liability for the home loan? He’s the one with the big bucks.

Wade’s Beef Is With His Ex, Not the Bank

According to the news reports, Funches stopped making the mortgage payments on the $1.2 million dollar home. She is now in default to the tune of $225,000. The bank started foreclosure proceedings against Wade and Funches.  But because Wade is still on the loan documents (this blog assumes that he is; it’s possible, but unlikely, that he’s not), his gripe is against Funches, not the bank.

His remedy is to go after Funches for any damages he sustains.  If Wade’s settlement agreement was like most, it probably has an indemnification clause in which Funches agrees to pay for any damages resulting from foreclosure or similar actions. If it does, Wade can bypass  a few steps before he tries to collect against Funches.

And what damages might Wade incur?

Wade Might Be on the Hook for a Deficiency After the Foreclosure

I’m sure Wade could care less that his ex-wife can no longer live in the home. But should he worry that the bank can get a judgment for a deficiency in the foreclosure action?  It depends on how much equity is in the home.

If you lose your home to foreclosure in Illinois, the lender can also get a deficiency as part of the foreclosure judgment. (Learn more in Deficiency Judgments After Foreclosure in Illinois.)  A deficiency is the difference between the unpaid loan balance and the amount the home sells for at the foreclosure sale. If your home is underwater, you’ll owe a deficiency. If you have lots of equity in the home (more than the unpaid loan balance), then you’ll be safe. (This is true in many other states. To learn about your state’s deficiency after foreclosure law, see Deficiency After Foreclosure in Your State.)

Example. The home sells for $200,000. You still owed $250,000 on the mortgage. The deficiency is $50,000.

So, if the unpaid balance on Wade’s mortgage is more than the equity in the home, the bank can get a deficiency judgment against him and Funches. Once the bank has the judgment, it can use various collection measures to get the money if Wade doesn’t voluntarily pay up. But let’s be honest. If Wade ends up owing even the full $225,000 (or a bit more once you wrap in foreclosure costs and attorney’s fees), that’s a drop in the bucket for him.

If Wade goes after Funches to recover any amounts he pays, he probably can’t touch the $25,000 she gets from him in support, but if there’s anything left of the $5 million settlement, he might be able to get that.

What About Wade’s Credit?

Having a foreclosure on your credit report is never a good thing. In Wade’s case, however, I doubt this foreclosure is going to affect his ability to get credit or take out loans in the future. Plus, since he’s worth $100 million, I’m not sure he needs credit like the rest of us do.

The Lesson for the Rest of Us

Unfortunately, this scenario is not unique to celebrities and their ex-spouses.  And unlike Dwyane Wade, most people that end up in his situation don’t have $100 million lying around to stave off a foreclosure or pay off a deficiency judgment.

So what does that mean?  If your ex defaults on the mortgage in the home that she or he is living in, you will be named in the foreclosure action. That means it goes on your credit report and if there’s a deficiency judgment, you’ll be on the hook for that too.  You can go after your ex to reimburse you for any amounts you pay (or any amount that get taken by the bank from your wages or bank account). But whether your ex has anything you can collect against is another matter.

How to Avoid this Situation?

One way to avoid this nightmare is to require that your spouse, as part of the divorce agreement, refinance the loan under his or her name only. Unfortunately though, because divorce and financial stress go hand in hand, often divorcing parties aren’t able to qualify for a new home loan on their own.

Another simple option is to sell the home. The parties divide up the debt and/or equity however they agree, and walk away.

The bottom line when it comes to divvying up the family home: Make sure you understand all of the eventual consequences if your spouse stops paying the mortgage. (To get informed about your options, see Divorce and the Family Home.)