What to do with the underwater marital home.
Dealing with the marital home in divorce is somewhat of a cyclical problem. Years ago, when most women didn’t work outside the home, and housing costs were not oppressive, there were many cases where the wife was awarded sole occupancy of the former marital home, but the parties continued to own it jointly. After a certain number of years, say when the last child was out of high school, it would be sold and the proceeds divided. Disputes sometimes arose about who would pay the mortgage in the meantime, and what portion each party got upon the eventual sale, but this was a common disposition.
During the years when real estate values were climbing, divorcing couples instead often sought to “cash out,” i.e., one spouse sought to compel the sale to get his or her equity back. This often suited both parties when they each wanted to free up some “deposit money” to buy a new home. The disputes often focused on who gets what share upon the sale. In the case of short term marriages, judges would often credit one party with his or her contributions toward the acquisition of the home; and in long term marriages, judges were inclined to divide the equity 50-50. Obviously, as you can imagine, there was a great deal of litigation in marriages of intermediate length.
Then when the economy turned south, equity in marital homes dwindled, and the disputes began focusing on how the debts were going to be paid, instead of how the profits would be split.
Nowadays, a large number of divorces in mediation or litigation have a common element: the house is worth less than the outstanding mortgage balance (i.e., “under water”) and the parties cannot sell the house.
This is an almost epidemic problem. I was in Probate Court for a hearing recently, talking to some of my colleagues in the hall between hearings, and one of them said, “I have a terrible case today, my client is still living in the marital home with her husband, and he’s set up a bedroom and is living in the basement.” I was struck by the irony, because my case involved a husband living in a former “in-law” apartment. But my third friend said, “I have you both beat. My client is living in an R.V. in the driveway.”
But it’s not funny at all, and mediators have had to be creative and think outside the box to craft new methods of dealing with this problem.
And there are some solutions.
Judges do not like to see formerly married people still residing in the marital home. Eventually, in most of those cases, the tensions eventually spill out of control and bad things happen, sometimes violent, especially when one party finds a new significant other and starts dating. Old wounds fester. Many judges will simply not approve such an arrangement, and if they do, they will only approve it if there’s an eventual cut-off date when one party must move out.
Loan modification programs and refinance programs are sometimes an option, but often, the parties cannot cooperate in completing the paperwork, or truthfully answer the application questions because they do not intend to mutually occupy the property or contribute to the new loan payment.
“Short sales” are sometimes an option, and we have good real estate professionals to refer our clients to who have accomplished great deeds getting property sold at a fair price and getting the mortgage lender to agree to accept the net sale proceeds. They often don’t work when there’s a second mortgage, however.
Sometimes, the best option is to file a bankruptcy petition. In a Chapter 7 case, the parties can walk away from the home and discharge their obligation to pay the mortgages. In a Chapter 13 case, second mortgages can be stripped and the ultimate monthly carrying cost reduced to an affordable level. And, when complete, the spouse who ends up owning it can achieve some equity again.
There are many more creative options to discuss, and mediating your divorce with a knowledgeable mediator can help you generate the option that’s right for you.