Two Options For Dealing With An Underwater Home When Divorcing

Posted on: 14 June 2018

Splitting assets that have retained their value is challenging enough during a divorce. However, dealing with a home where you owe more than the property is worth will require you and your soon-to-be ex-spouse to make some difficult decisions. If you're underwater on your home and trying to determine the best way to extricate yourself from the situation, here are two options available to you.

Sell and Agree to Split the Loss

Many experts may recommend that you and your ex wait until the market improves enough so that you at least will break even on the home before selling it. However, until that day comes, you and your ex would be both be responsible for paying the mortgage and maintaining the property. If you would prefer to make a clean break from your spouse with no lingering responsibilities between you, then the best option may be to sell the home and split the loss.

For instance, if your home has a market value of $200,000 but you owe $250,000, you could unload the home in a short sale and split the residual balance of $50,000 between you. You both could then liquidate equal amounts of other assets awarded in the divorce to pay your share of the remaining debt.

Depending on where you live and how well you negotiate with the bank, you could end up completely absolved of responsibility for paying the deficiency balance. While neither of you will recoup any of the money you put into the home, you won't be stuck with a huge bill either or having to deal with each other after the divorce has been finalized. It's important to note, though, that any amount that's written off by the bank will need to claimed as income on your taxes, so be sure to account for this in your divorce settlement.

Do a Deed in Lieu of Foreclosure

Another option for handling an underwater home is to walk away and let the bank take the property using a deed-in-lieu. This is a type of soft foreclosure where you sign the deed over to the bank rather than going through the courts. The bank gets the property to do with whatever it wants, and you and your spouse are released from your financial obligation towards it.

At first this may seem unbelievably irresponsible, especially since this can hurt your credit for up to seven years depending on how the bank reports this maneuver to the credit bureaus. However, you'll avoid a lot of the financial and time costs associated with either trying to sell the property or going through foreclosure, so you won't have to delay your divorce. Additionally, you'll be able to start repairing your credit faster and buy another home sooner than you think.

For more advice on how to deal with an underwater home during a divorce, contact a divorce attorney at firms like Dionisio Law.