We have been going through some of the worst economic times since The Great Depression. Numerous articles and newscasts have stated either that the housing market has bottomed out, or is still going down. In Michigan, we have the most depressed housing market in the United States. Other states, including Florida, California, and Arizona – just to name a few, are also going through some horrible economic times with regard to housing. In the past, before the economy bottomed out, homes were a family’s most valuable asset. In the last year and a half, that has changed substantially. In many of my divorce cases, the marital home is no longer an asset, but is heavily encumbered by debt. Many people purchased homes in the past ten years, expecting their home to become a piggy bank for future savings and retirement. Sadly, this is no longer the case. Many people were obtaining mortgages, followed by home equity loans and second mortgages, based upon numbers that no longer exist.
The key question that I ask many of my clients is “what do you want to do with your home”? In the past, a home was often kept by the wife, if she had custody of the children, with the understanding that it would be sold in a certain number of years, at which point the husband and wife would share in any growth, based upon the market. This is no longer the case. I advise clients, even when there is equity not to become too enamored with a home. If anything, this is a total buyers’ market, and it is the time to buy a home, not sell one. If there is equity and it makes sense to keep the house, then that should be given serious consideration. If there are other assets, then either the husband or the wife can keep the house by trading the equity off against other assets, including portions of savings, retirement accounts or perhaps another item of real estate.
Normally a divorce judgment and settlement agreement will have a clause that the person keeping the house shall make his or her best efforts to refinance and remove the other spouse’s name from the mortgage. If there is little or no equity, this becomes a very difficult task and in some cases, it may be years before there can be a refinancing.
Let’s look at the situation where the house in “under water”, which I see in the vast majority of my cases. There are still some options. One option is that one spouse will keep the house, subject to the negative equity, with the understanding that there shall be some offset and consideration given in trading this negative asset for other property. A second option is to try to sell the home, and work out a short sale with the bank. This can happen in some situations, but bear in mind that if it is not handled properly, it can negatively impact your credit.
A third option is when the encumbrance is too large and the payments are overly burdensome, some couples will just agree to walk away from the home with the understanding that they will both have negative repercussions on their future credit. In some cases, one party will stay in the house, without making any payments on the mortgage, until the home is actually foreclosed upon and then there is a sheriff’s sale, which in this economy, can take many, many months. Banks are often reluctant to take back houses because they have a huge inventory of homes that they have been taking back. To say the least, it is a very nasty situation.
In many of my cases, I work with bankruptcy attorneys on issues involving foreclosure, short sale and whether or not to attempt to go through a bankruptcy, especially if there is a second mortgage or home equity line, along with substantial credit card debts with not enough income to make it feasible to move forward without filing for bankruptcy. These are issues that should be discussed with a specialist in bankruptcy, which will definitely impact upon the divorce process, as a bankruptcy takes priority over a divorce.
Even in situations where there is equity in the home, do not become overly enamored with your home. Sometimes it makes sense to try to sell the home. Every divorce should be handled on a case-by-case basis, bearing in mind that your situation is not the same as your friend or neighbor’s. It is important to discuss all of these options with your attorney as the issue of the house is an important one and can impact upon your credit for many, many years.
Another point that I want to add is that even if you can afford the house, if it is going to take too much of your income to keep the house, it may be better to sell it.
Share this Article: