I’ve been a divorce lawyer in Charleston, South Carolina for over 20 years now and I have handled the division of marital assets including homes. Prior to 2008, property values were soaring, people built financial equity swiftly, and homes sold quickly during a divorce. When the recession hit in 2008, Ben Bernanke, the former head of the Federal Reserve, said it was the worst financial crisis was the worst in global history. Although I can’t speak for the globe, I definitely can say that the recession was a sobering experience for both divorcing couples. Specifically, many divorces became challenging because couples’ properties were “underwater” when they owed more on their mortgages than their homes were worth. Prior to 2008, separating a divorcing couple’s finances was a matter of deciding how much money or assets each spouse would get. However, after 2008, for many divorces, the question became a matter of figuring out how to deal with crushing mortgage debts.
Although I’ve seen the real estate market improve since 2008, there are many divorcing couples whose home is still underwater. This article explains solutions to the problems with underwater property in a divorce.
Keeping or Selling Your “Underwater” Home in Your Divorce
In an ideal world, you and your spouse should try to reach an agreement without fighting in family court over debts such as your mortgage. If you disagree, then a family court judge will make a decision about your property and your mortgage, and you and your spouse lose control over how to deal with the situation. In other words, your options become very limited when you fight each other in court.
The first thing you should decide is whether you want to keep your property. Perhaps you have young children and you prefer not to move them from their neighborhood or from their school district. However, before you decide to keep your home, there are a few things you should consider:
- Who’s on the mortgage? This question is very important. For example, if you are on the mortgage but your spouse isn’t, you may decide to keep the home, make your mortgage payments, and hope to build equity or at least break even when you decide to sell it. However, if you and your spouse are both on the mortgage, then BOTH of you remain responsible to the mortgage lender even after your divorce. For example, let’s say that you agree to let your spouse keep the home, and the family court issues an order making your spouse responsible for the mortgage payments. If your spouse stops paying or files for bankruptcy, then the lender can sue you for the payments because you signed the mortgage. Although you can ask the family court to hold your spouse in contempt of court for missing payments, the family judge has no authority to stop the lender from coming after you for the debt. For more information on contempt of family court in South Carolina, CLICK HERE.
- Can you refinance the property? Since 2008, mortgage lenders have much stricter lending standards. Many lenders won’t refinance your mortgage unless you have at least 20% of equity in your home or you come up with money to pay the difference at closing. In other words, for many divorcing couples, refinancing the mortgage isn’t a viable option.
- Can you get a loan modification? Even if you agree that your spouse may keep the home, your spouse may have a difficult time making the mortgage payments on his or her own. Some lenders will give you a modification to your loan to lower your mortgage payments. If you choose to go this route, you should know that the process of a mortgage modification can take months to approve, and you’ll have to give the lender very detailed financial information.
Walking Away from Your Underwater Property in Your Divorce
If you and your spouse decide to walk away from your underwater property, then you have a few options, all of which will negatively impact your credit rating:
- Short Sale – This is when you sell your home for an amount that doesn’t completely cover your mortgage. A short sale requires your mortgage lender’s approval which can take a few months for the lender to agree. After the home is sold, any unpaid balance on your mortgage is known as a deficiency. The mortgage lender can choose to waive the deficiency (cancel the remaining debt) or bring a lawsuit against you to collect the balance. If the lender waives the deficiency, then you must pay taxes on the canceled debt as if it were income to you.
- Foreclosure – This is when you stop paying your mortgage, and the mortgage lender files a lawsuit to take possession of your house and sell it to pay of the mortgage. Like a short sale, the lender can either waive the deficiency after the property is sold or sue you for the balance owed. Oftentimes, the foreclosure process can take months or even years. During that time, you can continue to live in your home even though you haven’t paid your mortgage.
- Deed in Lieu of Foreclosure – This is like a foreclosure, except you give the deed to your property to the mortgage lender instead of waiting for the lender to take your home in a foreclosure lawsuit. Also, you will lose your home much quicker than a foreclosure.
If you chose any of the three options I mentioned above, and the mortgage lender insists on you paying the deficiency, then you and your spouse have to decide how to handle the remaining debt from your home. Essentially, you have two options.
- First, you can agree on how to split the debt between you and your spouse, or one of you may agree to pay it all.
- Second, you can both agree that neither of you will be responsible for the deficiency. This second option has some risk. Specifically, the bank may ask a civil court judge (not a family judge) to order that your property be seized by a local sheriff sold at an auction. However, if you and your spouse are “judgment proof” because you have no assets, then you may not be concerned with a civil judgment. However, a civil judgment last for 10 years during which, at any time, the mortgage lender may come after your assets. Note that in South Carolina, the court can’t garnish your wages to satisfy a civil judgment. For a detailed explanation of how and what assets can be seized and sold in South Carolina, CLICK HERE.