Divorce in a tough market
If you are contemplating a divorce, you should know that your home's value could affect your finances for years to come. Before setting foot in a lawyer's office, read about the five most common scenarios that divorcing couples now find themselves in when they can't sell their house - or don't want to - right away.
LIVE AN UPSTAIRS/ DOWNSTAIRS LIFE
How it works "I call this 'The War of the Roses' option," says Jacqueline Harounian, a matrimonial law attorney at Wisselman, Harounian & Associates in Great Neck, referring to the 1989 movie starring Michael Douglas and Kathleen Turner.
In this scenario, the husband and wife agree to live together either before, during or after the divorce while the house is for sale. "Someone usually lives in a spare bedroom, the basement or on the couch," Harounian says.
Advice To limit battles, Harounian suggests negotiating a legal agreement on issues such as kitchen use, picking up the kids and grocery shopping. Work out arrangements for home repairs and monthly bills, she adds. Typically, she says, people contribute to household expenses proportionately, based on each spouse's income. If there are children, the parents must negotiate how their expenses will be paid. Child-support payments usually don't begin until parents are living apart.
Handling the house sale "It's crucial to provide for automatic reductions in the listing price," says Harounian. For example, if a house is worth $600,000, the couple could agree that the listing price will go down $20,000 for every three months the house is not sold. She also advises negotiating on the lowest acceptable selling price, as well as whom the Realtor will be, to avoid arguments later.
Upside This situation not only gives couples a chance to save money by sharing costs but to see if the housing market improves. It also allows for parents to continue joint care for their children and to ease into living separately.
Downside "While this option can be a short-term solution for some couples," Harounian cautions, "it's not going to be realistic or safe in cases where there is child abuse, domestic violence, mental illness, drug and alcohol issues, or new paramours."
The bottom line, says Pia Riverso, a matrimonial law attorney at Rivkind Radler LLC in Uniondale, is that some divorcing couples can't afford to move until the house is sold because of unemployment, income reduction and the cost of renting. "The 'upstairs/ downstairs' life is one that I increasingly see many of my clients take," says Riverso. "Unfortunately, however, in this housing market, it's a short-term solution that may end up lasting much longer than either side ever imagined - or wanted."
KEEP JOINT OWNERSHIP
How it works At the height of the housing market, at least one divorcing spouse usually wanted the house sold as soon as possible to make as much a profit as possible, says Riverso. Now divorcing couples say, "Let's hold on to the house and wait out the market," she says.
This is done, she says, when there is negative equity, which is when the mortgage and home equity loans exceed the value of the house. With negative equity, or an "upside-down mortgage," the homeowner would still have to pay off a portion of the mortgage even after selling the house.
With joint ownership, the couple gets divorced with only one party residing in the house, usually with the children. The couple agrees to postpone the sale of the house until a mutually agreeable date in the future (when the youngest child goes to college, for instance), or when the house can sell for more than the current mortgage, Riverso says. "Both names, however, remain on the title," she says.
Handling the house sale "The parties will sometimes agree that once the house is sold, whoever paid the larger share of the expenses to carry the house will receive a larger percentage of the net proceeds," says Riverso.
Upside Riverso says this is a good option for parties who have the financial ability to wait out the market, as long as they can get along well enough to deal with the issues that arise with owning a property together after a divorce. Other issues that often arise: figuring out who will pay a greater portion of the mortgage, who will be responsible for major and minor repairs, and who will claim the mortgage and tax deductions for the home.
Downside "Deciding when the right time is to sell the house can be a thorny issue for couples to agree on," says Riverso. "Often, one partner is more anxious to limit his or her losses created by a depressed market and more willing to break the financial and emotional ties. "
Another downside, warns Riverso, is that joint ownership can affect both partners' credit rating if payments aren't made on time. "A way to minimize this risk," says Riverso, "is to remove one of the parties' names from the mortgage through a refinance - which, in this economy, with lowering interest rates, may be beneficial in itself. I've had many cases where the wife was living in the house, always late with the mortgage payment, and to protect his credit, the husband made a check out to the mortgage company instead of sending his wife maintenance money. The balance, if any, went to the wife. "
BUY ME OUT
How it works The "buyout" is another possibility to consider: This is when one ex buys out the other ex's interest in the house (either in a lump sum or installment payments); lives in the house; and takes on the loan obligations. "The buyout is usually achieved with a refinance or home- equity loan," says Harounian, "either at the time of the divorce agreement or an agreed-upon future date, such as when the youngest child graduates elementary school. " In cases where the buyout is delayed for several years, the parties continue joint ownership of the house, and, in most cases, both benefit when the value of the house appreciates and is sold, she adds.
But if a refinance or home equity loan isn't feasible due to the current lending restrictions, the buyout can be accomplished by trading the house for other assets - one spouse keeps the home and, for example, the other keeps the 401(k), stock account, second home or business. "This reduces how much the spouse remaining in the house owes the other," Riverso says.
Upside This scenario allows one party to take advantage of the reduced equity in the house while saving on the usual expenses of selling a house to a third party (the broker fees and the transfer taxes, for instance), Harounian says. If the buyout is done simultaneously with the divorce, it will almost always be based on its current value. But if the parties agree to defer the buyout, they can have the house reappraised and renegotiate the numbers. "It all depends on how much risk and uncertainty each party wants to take on," says Harounian.
Downside Both parties remain on the mortgage, which, again, can harm both parties' credit ratings if there is a loan default. "The divorce agreement should have language triggering the sale of the house in the event of a default," says Harounian.
Getting a couple to agree on a buyout can be tricky. Harounian describes one client who was offered an "excellent" buyout by her husband. But because of the wife's anger, she didn't want her husband to end up with the house. She knew her teenage children would want to spend more time in the house they grew up in than in her small, rented apartment. The negotiations fell apart, and a year later the couple is divorced - but still living in the house.
TAKE IN A BOARDER
How it works "If it's economically possible, I try as hard as I can to keep a mother in the home with her children," says Robert Mangi, an attorney and chairman of the Matrimonial Law Committee at the Nassau County Bar Association. One way to defray housing costs is to rent out part of the house. Taking in a boarder can bring in $500 to $1,000 or more a month.
Handling the house sale To keep yourself out of landlord tenant court, make sure you have an agreement that establishes tenancy for a short time. Having a month-to-month agreement, for instance, is important if you want to sell your house. A lease, on the other hand, is usually for a year.
Upside "Renting space is a way to wait out the market until the house appreciates in value," Mangi says. "Continued home ownership provides tax benefits, and the children have the security of a familiar home and school district. "
Downside "If you rent to a stranger, you have no way of being sure of their ethics, friends, alcohol use or cleaning habits," Mangi says. "If you want to throw someone out, you could end up with a landlord-tenant dispute. And, disgruntled renters often wreck a place on their way out. " If possible, rent to a relative or a friend, he advises.
Renting out a portion of a house often requires permits from the town. There also are safety concerns (fire hazards, overcrowding, etc.). And many exes will threaten to reveal an illegal rental to the town after a fight, Mangi adds.
STOP PAYING THE MORTGAGE
How it works Legal experts agree that foreclosure, like bankruptcy, is a legal option that should be considered as a last resort and only after consultation with a lawyer. "This is an absolute worst-case scenario for divorcing couples who have negative equity in their home or can no longer afford to make payments," says Harounian. In this scenario, the couple stops paying the mortgage and bides time until there is a short sale or a foreclosure.
Upside Couples often can pay for critical expenses such as food, utilities, medical bills, credit card debt and litigation with the money that normally goes for mortgage and taxes.
"I had a divorcing couple with a special-needs child who went to a costly private school and needed expensive private therapy," Harounian says. "When the appraisal revealed that the house was worth less than the outstanding mortgage, the parties agreed to not pay the carrying charges on the house, await foreclosure and pay tuition instead. As it turned out, the bank didn't commence foreclosure proceedings, and the couple is trying to work out an arrangement with the bank. "
Downside "Eventually, if you don't catch up on your mortgage, or modify your loan, you will be evicted," which can take six months or longer, says Nancy Sherman, an attorney in Lake Success specializing in divorce and real estate. "While some people may stop paying their mortgage, they should make sure the homeowner's insurance remains current because the foreclosure process can take a long time. This will protect them in case of a fire, or for liability purposes if someone is injured on their property. "
If there is an order issued by the court in an ongoing divorce action directing that one party pay the mortgage, failure to comply could lead to imprisonment, a fine or both, she warns.
And, "for allowing your loan to go into arrears, your credit rating will be affected for seven to 10 years," Sherman says. "This can also interfere with renting an apartment of your choosing in the future, because landlords generally run a credit search."