Divorce and a House With Negative Equity

a person holding a cut out of a house in front of some grassDivorcing couples often face a large variety of issues.  Divorce is an emotional and often financially difficult time.  Where two people have resided together and pooled assets to try to make ends meet, a divorce means that now both parties must learn to stand on their own and pay their own bills.  The divorce will also mean that the parties’ assets and debts must be divided.  Minnesota law provides that the court will make an equitable division of the marital assets and marital debts.  In many cases, the marital residence is the largest asset to be divided.  There are some cases, however, when the marital residence has actually become a large financial liability.

 

Negative equity means that the mortgage on the house is more than the value of the home.  This is also sometimes referred to as being “underwater” or “upside down” on a mortgage.  However you refer to it, this presents some very specific problems, but there are several ways that a court or the parties may choose to deal with the problem.

The first way could be that the spouse who retains the home and agrees to continue paying down the negative equity receives a “credit” in the form of a larger share of the marital assets.  For example, if the parties’ home has $30,000 in negative equity, the spouse retaining the home may receive a proportionately larger share of the other marital assets in order to offset that large $30,000 debt that he or she is agreeing to take on.  When both parties are on the mortgage, this is probably a less-than-ideal solution.  Banks are often reluctant to refinance a home that has negative equity in order to remove one spouse from the mortgage documents.  The spouse moving out will probably be unwilling to have his or her name continue to be associated with the mortgage for a home where he or she no longer resides.

Another option is to “zero out” the debt.  This is the simplest approach and of more benefit to the party who is leaving the home behind.  In this approach, the negative equity is simply ignored when making a division of the parties’ assets and debts, with the reasoning being that the home is a long-term investment and the party remaining will eventually have positive equity in the home.

Finally, the parties may choose to seek a short sale.  This means that the homeowners will sell the property at a loss.  This is not an option unless the lender agrees to allow it to happen.  Although the process allows the parties and the lender to avoid a foreclosure, it can still be detrimental to the parties’ credit rating and finances.

If you have a complicated property division case, let us help you.  Call us today and we can talk to you about your divorce and your options.

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