The housing crisis led to a slew of foreclosures and many more people struggling to make mortgage payments on their home despite being severely upside down. This is a particular problem here in Florida, which is one of the states that was most effected by the meltdown of the housing market. Historically, couples involved in a Florida divorce would negotiate over who would get to keep the family home, which often involved one party buying out the equity interest of the other spouse. With the majority of Florida homeowners now saddled with negative equity, there are new issues to consider in a Florida divorce.
Negative Equity Common in Divorce
If you are involved in a marital dissolution in Florida, you may have negative equity. Many Florida residents that purchased their homes when the housing market was high between 2005 and 2007 saw their investment devastated when home values plummeted. Couples embroiled in a Florida divorce also may have negative equity because they took out a home equity line when the housing market was strong only to have the property value fall after using the home equity line.
If a home has serious negative equity, the spouse that relinquishes his or her interest in the family residence typically will remain obligated on the mortgage. While a spouse may quit claim their interest to the other spouse, this only impacts title and not the underlying financial obligation to make mortgage payments. This may pose serious problems particularly if the spouse awarded the home becomes unable to make the mortgage payments. Any negative credit impact from late payments or foreclosure proceedings will still adversely impact a spouse that quit claims his or her interest to the other spouse.
Refinancing and Division of Property
While the party that takes the house may be able to refinance the home to remove a spouse from the mortgage, this is an unlikely scenario given the current tough lending policies of many banks and the reality that the home has negative equity. If the spouse remaining in the family home cannot refinance the residence, it also means that the home will continue to appear as an outstanding obligation on the other spouse’s credit report. The debt load from the mortgage and the home’s negative equity can make it extremely difficult for the spouse who gives up the home to purchase his or her own home.
Even if you have a small amount of positive equity in your home, it can be difficult for a spouse to get their equity out of the house as part of an equitable division of marital property. The house may not be able to be sold or refinanced because of current tight lending policies and the slow real estate market so the ability of a spouse to buy out the marital property interest of the other spouse may depend on what is available in other assets like retirement plans. If the family residence is the primary asset in the marriage, it can be challenging to develop an equitable distribution of property because of the limited options for disposition of the family home.
Strategic Walkaway from Real Estate
We see an increasing number of couples involved in Florida divorces that decide to engage in a strategic walkaway. Neither spouse may want to assume the negative equity in the home so it may make more sense to simply allow the bank to take the family residence. Sometimes a short sale can be utilized to avoid the full negative credit impact of a foreclosure. However, the difference between the amount owed and the price the bank accepts can be considered income for IRS purposes so it is important to discuss such a disposition with an experienced Florida divorce attorney that understands tax issues. If you have questions about the family home or other issues regarding division of property and debts during a divorce, an experienced Florida divorce attorney can answer your questions and explain your rights.