Divorce in a Depressed Housing Market

“We can’t sell our house in this market. If we did, we’d be upside down on our mortgage, and we don’t have the money to pay it off.”

I’m hearing that lament more and more from clients. They want to move apart and put a legal end to their marriages, but they’re stuck with a house that’s worth less than the payoff balance on their mortgage.

Articles have appeared in several newspapers during the past few months, highlighting this problem. When the economy was good, most homeowners’ largest asset was the equity in their homes. Couples dividing assets in a divorce usually chose one of two options: sell the house and divide the net proceeds, or have one spouse keep the house, refinancing the mortgage in order to pay half of the equity to the relinquishing spouse.

In today’s housing market, when so many couple’s homes have little equity or are even worth less than their mortgages, traditional options go out the window. In their place are two much less desirable options: one of them stays in the house--and both of them stay tied to the mortgage--or they both walk away, allowing the house to go into foreclosure and ruining their credit ratings.

This dilemma is making divorces more prolonged and expensive, as couples fight over who gets stuck with the house. Some couples, unable to afford separate residences, continue to cohabit uneasily as they wait for their home to regain value.

I’ve recently mediated two cases where couples wanted to set up agreements to help them live separate lives while they continue to live under the same roof. Each couple was able to create a structured agreement setting up “on-duty” periods when each was responsible for overseeing their children’s needs, getting them to schools and activities, etc. Their agreement included financial arrangements and ground rules for behavior when in the house together.

Mediation provided a solution to a very difficult situation. These couples still have to deal with the ambiguity of living under the same roof, of course, and the situation definitely puts off or at least slows down the emotional separation process. On the other hand, their arrangements support them in dealing creatively with conflicts as they arise, thus lessening negative impacts on their children. They have found an effective way to deal with an almost impossible situation, and it's one that they themselves created together.