A major aspect of our caseload over the years has been divorce. A major aspect of our divorce practice over the years has related to division of marital property. A major facet of marital property division over the years has been disposition of the marital home.
Back in the late 1990’s and into the early mid-2000’s, the major asset held by a couple in a divorce case in Denver was their home. Back then, people actually fought over homes in terms of who would keep the home and how much the person leaving it was going to get. Now, as then, there are essentially three options for disposition of a home in a divorce case:
1. The wife keeps the home.
2. The husband keeps the home.
3. The home is sold.
Again, these three options are the same today. However, in what I will call the “olden days,” if husband or wife was going to keep the home, generally the parties would have to agree upon the value or an expert home appraiser would be hired to provide a value. Back then, values were increasing and everyone wanted the house. Because values were increasing, the general outcome would be one party agreeing to keep the home and refinance it into his or her individual name. As part of the refinancing process, he or she would take out essentially half of the equity to be given to the other party. People gladly took on the debt alone, as there would be a pay day at the end based on increasing values. If neither party wanted the house, it was sold and the parties generally had equity to split.
One result of the increasing home values and so much equity accruing was that people would pull money out of their asset or investment via a second, or sometimes third, mortgage. People believed the good times would never end, and their homes almost became like personal banks from which to draw or borrow funds. Why not, the value was just going up?
The olden days are gone. As Denver area divorce attorneys, we have seen an alarming trend over the last 3 to 4 years. As we all know, home values have decreased significantly. In some areas of town, homes have decreased 25 – 30%, or more. Fortunately, we are not in Las Vegas or Phoenix, where values have dropped 50% or more. As a result, and factoring in the drain of equity via second and third mortgages, probably 9 out of 10 divorce clients come to us with no equity in their home, or so little equity that the house will be upside down after factoring in realtor fees if sold.
As a result of the decreased home values, it seems as though no one wants the home. If they do, they have a much more difficult time refinancing solely into their individual names. In the olden days, when credit markets had not dried up and subprime loans were easier to get than a cold, people could refinance a home in 60 to 90 days, and divorce orders often reflected such. Today, if someone decides he or she will keep the home, some metro area judges have even been known to give people up to 3 years to refinance. For those lucky enough to have equity to divide, the party leaving the home may have to be resolved to waiting some time before his or her equity can be pulled out via a refinance.
Of course having to leave your name on the mortgage presents its own set of concerns. What if the spouse staying in the home defaults on the loan? The mortgage company will certainly come after both parties. Generally parties will agree, or courts will order, that the home be immediately sold in the event of a missed mortgage payment; this poses another challenge to our clients.
Let’s assume that the parties agree, or the court orders, that the house will be sold. For the roughly 9 out of 10 families who are upside down, a sale will mean digging into their pockets or drawing from another asset to come to the table with money. Sometimes this can be tens of thousands of dollars. The reality is that the average family does not have that kind of money. Thus, the reality further sets in, leaving them in the position of having essentially 2 options: short sale or foreclosure. I will state that prior to 2007, our attorneys had never heard the term “short sale.” Today, it is commonplace. With no one wanting the marital home and no one having the funds to bring to the closing table, the reality is that short sale or foreclosure are now common resolutions to disposition of the marital home.
If one party wants to foreclose and the other does not, bankruptcy may be just around the corner. We sometimes see bankruptcies filed while the divorce case is pending. The insolvent party generally knows to do this before the court enters orders regarding the home. Some people get out of their court-ordered or agreed upon orders regarding the home, after the fact, via Chapter 13, which can provide post-divorce protections that Chapter 7 cannot. Thus, someone may have his or her debt absolved while the other is left holding the bag.
The primary thing that we attorneys can do today, besides remembering the olden days, is to make sure that we help our clients arrive at appropriate agreements, covering all the angles:
1. Providing your client who is keeping the home ample time, at least 1 year, to refinance prior to a forced sale.
2. Providing protective language to our clients not keeping the home, including insisting on a set time to refinance and insisting on language regarding sale in the event of a missed mortgage payment.
3. If our client is the one not keeping the home, we will generally insist on language indicating that the party keeping the home shall be solely responsible for any debt related to the home and shall indemnify and hold our client harmless.
4. In the event of a sale where there is no equity, we will insist on specific language indicating that any liabilities or money owed, including that to be brought to the closing table, will be split (generally equally). We will also insist on specific language as to the house being put on the market expeditiously and kept on the market, in sellable condition, until sold.
5. Sadly, in some cases, the parties actually agree that the home will go into foreclosure and that neither will be responsible for the debt, as they are both filing for bankruptcy.
At Plog & Stein, we hope that the good old days come back to Denver and that people are able to view their homes as an asset worth fighting over. Today, it seems people are left fighting over how to split a negative. Our family law attorneys can help you resolve what to do with your home in the divorce case, whether it is upside down or right side up. The key is specificity in any agreement or order.