Divorce and the Underwater House

Suppose you and your spouse are getting divorced and you’re working on a property settlement. What can you do if the mortgage balance on your home exceeds the home’s value?  Consider these two scenarios.

• Scenario #1: You want to stay in the home.  Your spouse will prefer that you refinance the mortgage so that you alone are indebted to the lender.  To accomplish this, it may be necessary to use some marital assets – in addition to the new loan proceeds – to pay off the existing mortgage.  But what if refinancing isn’t feasible?  Your spouse may agree to let you keep the house if you promise in writing to protect him or her from any personal liability for the mortgage balance.  If so, your spouse will want to make sure that you have sufficient resources to make good on that promise.  Another possible solution is shelter support. Here, your spouse continues to make the mortgage payments or contribute to them.
• Scenario #2: Neither of you want to or can assume the mortgage liability alone.  In that case, there are several possibilities – some with colorful names.

Roosting.  You both agree to remain in the home and share expenses until the house can be sold for what’s owed on it.

     Short Sale.  You and your spouse sell the house for less than the mortgage balance, and the lender agrees to accept the sales proceeds and cancel the rest of the mortgage debt.

     Squatting.  One or both or you remain in the house, making no mortgage payments.  You wait out the foreclosure period which may last a year or more.  The downside: the mortgage company may try to collect from you if the house sells for less than the mortgage balance.

     Jingle Mail.  Both of you move out and surrender the house to the mortgage company.  (“Jingle Mail” suggests the sound of keys being sent in.)  Caution: Unless the bank agrees to cancel the mortgage debt, you can still be personally liable.

     Deed in Lieu of Foreclosure.  Both of you deed the house to the mortgage company which agrees to accept it in place of a foreclosure sale – and agrees as well to forgive your personally liability.

     Bankruptcy.  This gets rid of any personal liability for the mortgage balance.  You might look into completing a joint bankruptcy before your divorce is final.

 The attorneys at the Ann Arbor firm of Hamilton, Judge, Schroer & Steingold can help you explore these options and apply them to your own, unique situation.