Divorce Mediation: Options When “The House” is Underwater

Often a divorce will involve a decision about “who gets” the marital residence (and any mortgage associated with it).  The marital residence usually is one of the largest assets for any family, so it can take a prominent position in settlement negotiations and/or what a judge may do with it.

underwater-mortgage-300x200Selling the marital home and dividing up the proceeds of the sale used to be an easy proposition, but not now.  Selling the marital home can be hard in divorce, particularly where so many more homes have mortgage balances that are greater than the potential sale price.  When this occurs, the home is often described as being “underwater,” meaning more is owed on the home than it is worth.

In divorce mediations, the issues related to a marital home that is underwater can be tough, but not impossible.  Where a couple decides not to sell the marital home that would result in immediate debt, some common options include:

  1. Refinancing the mortgage in the name of the spouse who will retain the marital home;
  2. If refinancing the mortgage is impractical, typically the spouse who keeps the house will also agree to pay the mortgage and protect the non-paying spouse with a reimbursement and indemnification clause;
  3. Consulting with a Financial Professional regarding the use of retirement benefits, such as 401(k) accounts, to address the mortgage;
  4. Consulting with a tax professional or attorney regarding the tax implications of the spouse who may pay alimony and child support to the other spouse when that paying spouse pays for the mortgage on the other spouse’s home where the children primarily reside;
  5. Consulting with an attorney regarding the pros and cons of foreclosure and/or bankruptcy.

There are other options and rarely a perfect answer to these financial quandaries.  The good news seems to be that the economy is starting to show signs of recovery, rumblings that may make the “underwater” market less deep.