Divorce and the "underwater" home
Many people considering divorce are concerned that, after they are divorced, they may not be able to sell the residence or, even worse may have to reside together after the divorce if they cannot sell the home. This is of a particular concern when the house is "underwater," where the appraised value of the home is less than balance of the mortgage (or mortgage and equity loan or second mortgage.) This is known as a deficiency; the difference between the value of the home and the balance of the mortgage and often the costs associated with attempting to collect the balance.
There are several potential solutions to this problem. First, while it might be counterintuitive, the parties while getting divorced can attempt to work together to solve these issues. Often one party is willing to stay in the home and "ride the market out." This may require some concessions from the party that does not retain the marital home, however, if the parties can agree, this can save them from facing a certain instant deficiency where they will have to come up with money at closing from other sources of savings. In addition, characterization of payments between the parties as spousal or family support may allow the parties to take advantage of income tax differentials and overall save the parties some money in the form of taxes.
A second possible solution is that the parties can sell the home at the best possible price and take money out of retirement funds to cover any deficiency. While this is not an optimal solution, it is often effective. The money can be drawn without penalty at the time of the divorce and brought to the table. This allows the parties to move on without one party bearing more risk or potential windfall from improvement in the market. It also appears from personal experience with my clients and associates that homes in the area are starting to move, especially now that it is spring. If you do intend to file for divorce in the next twelve months and would like to potentially sell the home, now is the time to file so that we may put the house on the market as soon as possible and take advantage of the summer selling season.
A third potential is to simply walk away from the home depending on the size of the differential. Unfortunately, some homes are so far "underwater" that the only reasonable solution is to attempt a "work out" plan or deed-in-lieu-foreclosure with the mortgage holders. If this is not possible, walking away from the home may be the choice to take. This allows the parties to take the money that they would otherwise be spending monthly on the mortgage and save it to use for obtaining a new residence before the mortgage company or other debt holder is able to foreclose and evict the parties.
Further, there are so many people doing this nationally, I predict there will be a glut of these types of cases, so much so that the debt holders/mortgage companies will either cease their useless attempts to collect or additional specific legislation will be introduced to protect people from collections on these types of debts.
One last possible solution for the purposes of this newsletter comes from California and is used where there are children and it is called "nesting." The children remain in the marital home and the parties rent an inexpensive one bedroom condo or loft. The parents then alternate living in the marital home and the second residence until the home sells (or the market improves) rather than moving the children between the parties' separate residences. This proposition has not been met with much acceptance by my clients; however, it is a possible solution to this complex problem.
These are only a few potential solutions. There are many possible ways of dealing with this issue and the divorce process can be very flexible if the parties are able to "get along" in order to move on with their lives. A solution can be fitted to every situation. One cannot wait forever for the situation to improve; action is required in order to improve it.