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Negative Equity in a Home, Residing in a Comunity Property State

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  • 11-03-2010, 05:47 PM
    BloodyJack
    Negative Equity in a Home, Residing in a Comunity Property State
    My question involves divorce in the State of: Washington (Community Property state)

    Spouse and I are getting a divorce, which we have both agreed should be uncontested. There are a few details we are having differences on though. Here is a quick summary of our situation:

    We owe $197,000 on a home that is estimated to be worth $170,000. The house also needs a new roof, fence, and a few other things before it could be sold. The estimated costs needed to bring the house to the point it could be sold is approx $10,000.

    We also have $20,000 in credit card debt.

    Assets are of approximate value in the $16,000 range. And those could easily split evenly with no contention.

    Questions:

    Are the costs associated with bringing the house up to par typically looked at as an addition to the negative equity currently in the house? ie. We are at -$27,000 equity in the house. Should the -$10,000 in repairs to the house that are needed, be added to the negative equity in the house when it comes time for division of debt?

    My suggestion to my spouse was that I would take the home and the -$37,000 (negative equity and house repairs needed) plus $8,000 of the physical assets. Putting me at walking away from the marriage with a total debt load of -$29,000.

    My spouse would accept the -$20,000 in credit card debt plus $8,000 of physical assets. Putting them in the position of walking away from the marriage with a total debt load of -$12,000.

    The $8,500 they would normally owe me to bring our respective debt loads even, would be waived by me in exchange for no spousal support/maintenance.

    ...

    Here is the dilemma:

    My spouse believes that it might be in their best interests to force a short sale of the home (having the bank agree to accept whatever we could sell it for as full payment on our debt). We both walk away from the house in the clear, but with a huge hit to our credit... Then we would split the -$20,000 in credit card debt at -$10,000 ea. And my spouse recieving $200/mo in spusal support/maintenance for several years.

    Further even if my spouse accepts my original plan they believe that they should be entitled to a percentage of any profit I make off of the house in the future. I am honestly not seeing that logic in the least.

    ...

    Some further info: I am employed, they are not, but can be. We estimate I will be making about twice what they will likely be (me: $2,900/mo, them: $1,450/mo). We also have a 12yo son together. We have been married 15 years. Also, my spouse does not want the house in any way shape or form.

    So, assuming we cannot come to terms on this point and the divorce becomes a contested one.


    • How likely is the court to be to see my solution as a reasonable one? Obviously it certainly seems to me to be so.
    • How likely are they to force us to short sale the house and take a huge hit to our credit when I am willing to take it over to avoid that?
    • How likely are they to say that if I do take the house that she will be entitled to a percentage of it's profit at some point in the future?
    • Finally, how likely (looking at our relative incomes) is the court to give her spousal support/maintenance?

    Thank you all so much in advance for your help and advice in this.
  • 11-05-2010, 09:53 AM
    Mr. Knowitall
    Re: Negative Equity in a Home, Residing in a Comunity Property State
    If the house presently appraises for $170,000 and has a FMV of $197,000, the difference is $27,000.

    If you and your spouse want to sell the property, investing $10K in the home to get it ready for sale would be a reasonable and from what you've told us probably a necessary step - and there are additional costs to sale, including real estate agent commissions and closing costs. If one of you wants to keep the home, it's reasonable to apply FMV - although you're free to negotiate over the issue of "necessary repairs".

    Often when one party keeps the marital home, the divorce decree keeps the present mortgage in place and defers the division of the equity in the home until such time as the house is sold or refinanced, the minor children reach adulthood, the spouse who keeps the home remarries, or some other contingency. Usually, that's because one party can't afford to buy the other out at the time of divorce, or because the spouse keeping the house can't afford to refinance and pay out the other spouse's equity. You don't have to agree to such an arrangement, and it wouldn't appear to make sense to do so under the circumstances.

    You put yourself at risk in "dividing" credit card debt, because credit card companies aren't bound by your divorce judgment. If your ex- doesn't pay "her share" of the debt and you're on the credit cards, they'll come after you. The same holds true if she declares bankruptcy sometime after the divorce. You will also want to be absolutely sure that no new charges can be made on the joint accounts after the divorce - that any cards she keeps are exclusively in her name, with no option of "reopening" joint charge accounts.

    You can't count on being able to short sell the property - your bank may not agree. Further, you can't count on that happening over the short-term. I don't know your lender, but many financial institutions want to see you significantly behind on your payments before they'll consider a short sale (and yes, that damages your credit even if you aren't ultimately approved for the short sale). You could get to that point and discover that your lender prefers to foreclose.

    In a contested divorce, in which you'll be putting that $10K into lawyers instead of a new roof and home repairs, the court is likely to try to come up with a 50/50 split of the property. The bank can order the home sold, but cannot order a short sale - if you have the opportunity for a short sale the court can consider that, but the court has no authority to order the bank to write off any portion of your debt. If you go to court in agreement that the home is worth $170,000 and are prepared to refinance the house to remove your spouse from the mortgage, and your spouse does not want the home, I would expect the court to award you the home on those terms. If you want a mortgage that includes your spouse to remain in effect, you may end up with the type of deferred arrangement I previously mentioned, and I suspect that it's going to be extremely difficult at that point to get your wife to contribute if the home remains upside-down, even though she'll be happy to take a share of the equity if the market bounces back.
  • 11-05-2010, 12:31 PM
    BloodyJack
    Re: Negative Equity in a Home, Residing in a Comunity Property State
    Thank you very much for your input on this.

    So assuming it is contested, and assuming the court realizes that I am willing to keep the home and accept all of the associated debts along with it, do they typically at that point do something along the lines of:

    "Mr. X in accepting the home realizes a minimum of a $27,000 debt. The only remaining debt is on a single credit card holding a debt of $20,000. Mrs. X will be assigned this debt."

    And assuming something like that occurs, is the disparity in the relative debt load, factor into the idea of spousal support? ie. Will the court say:

    "Due to the fact that Mr. X is assuming $7,000 more in debt and there is no available way for Mrs. X to make that up, total spousal support will be assumed to be equal to that $7,000 and Mr. X by taking the higher load will be recognized as owing no more support."

    Last question: If all of the above occurs, but I am unable to get the house refinanced through myself only and by necessity she remains on the house note. Can the court simply say during the decree that any future income (either negative or positive) from the sale of the house would be my responsibility?

    Thank you again.
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