Dealing with the marital home is complicated in our tough economic times. Ten or fifteen years ago when I was doing divorce settlements, one of the most valuable assets was the marital home. Almost every home had equity, along with pensions and 401(k)s. In many cases, especially if primary custody of the children was with the wife, there would be a settlement reached which would include a provision regarding the marital home. Often the wife and children could remain there as long as there was no remarriage or until the youngest child reached the age of 18, or some other key age. If the wife was paying the mortgage payments, she would get credit for reduction in principal on the mortgage, and at the time of sale or a buyout, after payment of closing costs, real estate commissions, and any other expenses for repairs necessary for sale, the net proceeds would be equally divided.
What about now? I rarely see a home with equity. Most homes are upside-down, often having a first mortgage and a second mortgage or a home equity loan with the value of the house being much less than what is owed. What do we do in this situation? I have told clients in the past and I emphasize this again and again, even if the house does have some equity, it is important not to become emotionally attached to a house. People don't want to move or be uprooted, but if there is a divorce, often it makes sense to move on. Can either party afford to continue the payments? If the house has a negative equity, in Michigan where I practice often that is not considered though there are some recent cases considering that, and often it will be part of the equation in adding up assets and liabilities in a property settlement.
What are the options? The first option is to sell the house and take a loss, which means often coming up with money from savings or 401(k)s which have been sadly diminished in our economy as well. A second option is if the parties can afford it, for one to stay there and in some cases, both parties where there is not enough money, and hope for the market to come back. In this day and age, that is usually totally unrealistic. A third option, if either party can afford to keep the house, is for that one party to do so, and make the payments going forward.
A fourth option is a short sale. In a short sale, if the bank or mortgage company will allow it, the parties can sell the house for less than the equity without having to pay the shortfall. This takes difficult negotiations, and I have had many cases where attempts at short sales have failed. It can also impact negatively on your credit.
I have more and more cases where the houses are allowed to go into foreclosure because one or the other party does not have enough money to keep the mortgage current. In that situation, one or both spouses can remain in the house. They will stop making payments for months and even years, until the house is finally sold by the bank or mortgage company, or they are evicted. Is this a good solution? In some cases it works, but the reality is that everyone's credit will be badly damaged. Sometimes in our economy it is a necessity.
I have other divorces where there is some equity, or there is not a large deficiency on the mortgage. In these cases sometimes it is possible to refinance, though that can be difficult as well. Credit is extremely tight and it is very hard to do a refinance or new mortgage.
In summary, it is important to be creative with regard to your home in a divorce. Don't be emotionally tied to your home. Sometimes it is important to start fresh and make it an adventure so that you and your children are starting out not only with a new life, but a new house or apartment. In Michigan, and many other markets throughout the country, real estate prices are still tumbling. These are difficult questions that call for creative solutions. What has happened to you with your house during your divorce? Let me know.