Lower Home Values Change Divorce Structure

The market’s down turn has changed how spouses negotiate divorce settlements and how courts divide property.  Not long ago a couple’s home was most likely their most valuable asset and it was the number one piece of property over which spouse would fight.  Not in 2012.  It is more common now for a house to be worth less than the mortgage so the spouse who ends up taking the home takes the risk of possibly not recouping the money the couple may have put into the home.

Property Division in a Divorce

Under “normal” circumstances, if one spouse is awarded the home, the other spouse must receive his/her share of the home in some other asset. For example, if a house is worth $300,000.00 and there is a mortgage of $100,000.00 there is $200,000.00 in equity to share. The spouse who keeps the house must pay the other spouse his/her share of $100,000.00. The money can be paid in more retirement assets or could be paid through a lien placed on the house in which case the spouse who doesn’t get the house might not get paid until the home is sold. The other option would be to put the house on the market immediately and the spouses equally share the proceeds of the sale and both spouses end up moving to new places.

How Do Spouses Divide a House When it’s Under Water?

When the mortgage on a house is more than the value of the home, it is referred to as being “under water” and there is no equity to share. The house itself does not have value even though the couple may have purchased it with the intention that it would become their most valuable asset.  In fact, the spouse who agrees to take possession of the homestead and responsibility for the mortgage takes the risk that the home may not ever be worth what it once was.

Short Sales and Foreclosures

Some spouses have to sell their homes in a short sale and both spouses end up getting nothing for the home.  Some spouses decide to stop paying the mortgage to save money for a new place to live and let the home go into foreclosure. The problem with both a short sale and foreclosure are the detrimental effects on a person’s credit rating. A bad credit rating is especially bad because it makes it difficult to rent an apartment, buy a car or even get good rates on insurance.

The biggest problem for a divorcing couple can occur when one spouse is willing to let the house go into foreclosure and one is not. That means the spouse who cares about his/her credit rating may be forced to continue to make mortgage payments until the divorce is final or an agreement can be reached.

Getting Help

Hopefully the housing market will come around and the problem with losing equity on homes will disappear. Until then, couples considering divorce should consult with an experienced family law attorney to fully understand all the options and the consequences of dividing property when a home has lost value.