One of the most troublesome problems facing divorcing couples in a “down” real estate market involves division of the marital residence (or other real property they may own together). Often, couples have little or no equity in the marital residence and neither spouse will be able to re-finance the debt into their name alone.
When both spouses are joint debtors under the mortgage, a divorce decree by itself will not limit their individual liability for payment of that mortgage, and in these economic times, many mortgage lenders will not agree to release one spouse from individual liability under the mortgage.
Traditionally, one spouse agrees to be responsible for the mortgage payments (becoming essentially the property “owner”) and to indemnify the other spouse from any claims by their mortgage company until the house is sold or the mortgage is paid off; this agreement is usually secured by a lien against the marital residence (so that the other spouse is now placed in the role of a “lienholder” although behind the mortgage lender and perhaps other creditors). In other words, the “lienholder” spouse giving up the marital residence has to hope that the “owner” spouse will be able to continue making mortgage payments after the divorce and – if he or she can’t – must be ready to step in and pay the mortgage to avoid foreclosure of the property and being sued individually for any deficiency between the sales price and the accelerated amount of the mortgage.
If the marital residence has “equity” – in other words, if the value of the property is substantially more than the full amount required to pay off the mortgage – this is generally not a problem. But if the marital residence has little to no equity, or is “underwater” because the property is now worth less than the amount of the mortgage, divorcing spouses have to make some very tough decisions concerning future liability and financial risk.
Even when a divorce is “agreed” and there are essentially no disputes between the spouses about dividing marital assets, in situations where the marital residence or other real property carries substantial debt and little equity, it is best to consult with a family/divorce lawyer to advise you on potential methods for handling the marital residence in a way that will help limit exposure to potentially large and unexpected expenses after the divorce has become final.
Blog by Cynthia W. Veidt