Plunging property values can complicate a divorce case.
One particularly difficult situation in a divorce case is when what usually constitutes a married couple's largest asset -- their home -- turns into their largest debt. The sliding economic fortunes of a particular geographic area can send property values plunging to the point where a home's fair market value falls not only below its purchase price, but also below the couple's mortgage balance. This creates complications for the divorce case and may spell financial ruin for both parties.
Property and Debt Division in General
Family courts divide marital property and debt under the laws of either equitable distribution or community property. Community property states seek an equal division; ED states seek a division that is equitable, or fair. Fair and equal don't always mean the same thing, so ED statutes contain a list of "distributional factors" that can justify an unequal division. Courts in both types of states prefer to distribute assets intact without selling them off to divide the equity. Jointly titled real estate can be either a marital asset or a marital debt, depending upon the balance between its value and the mortgage.
Valuation and Distribution of Homes in Divorce
When a home constitutes part of the marital estate, the correct measure of value is fair market value or what the property would sell for right now. Parties may also use a recent appraisal or hire a professional appraiser to offer an expert opinion on the home's value. The mortage balance is then subtracted from the fair market value to derive a net asset value. If one party wants the house and can pay for it, a court may order him to refinance the debt into his own name. The court may order him to pay the other side her share of the equity or make up for it in the form of other assets.
Complications When a House Loses Value
The usual way of handling the former marital residence doesn't work well when a home has lost value. If the parties owe more on it than it can sell for, they are "upside down" in the property. A bank won't lend more money on it than it is actually worth, and some banks won't even lend the fair market value. This makes a refinance impossible even if both parties qualify for a loan. A court may order the home sold and divide the deficiency between the parties. In such a case, the parties would each have to bring money to closing.
When the Parties Cannot Cover the Debt
If a couple cannot tap any resources to cover the shortfall between the mortgage and the home's value, they can sometimes still resolve the case if one party can stay in the home and pay the mortgage pursuant to an agreement to periodically attempt a refinance in an effort to clear the loan out of the other party's name. If neither party can afford the home on their own and they can't sell it for enough to cover the debt, this may be one factor in deciding whether or not to file bankruptcy.
Tags: fair market, fair market value, market value, court order, divorce case
