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Mortgaging Your Post-Divorce Future

Mortgaging Your Post-Divorce Future

If you’re going through a divorce, many people could get involved and provide you support.  You hire an attorney and you work with the law firm’s staff.  You’ll be able to rely on family and friends. Many people will care about your divorce. One group of people who couldn’t care less are those working for the company holding your mortgage. If you and your spouse are responsible for paying a mortgage, a divorce won’t change that. You can get married and divorced as often as you’d like.  If the two of you signed up for that mortgage, the two of you are responsible for paying it.

If you are getting divorced, mortgage issues need to be addressed. A divorce decree stating your spouse will be responsible for paying off the mortgage has no legal impact on the lender. When the mortgage papers were signed, the two of you agreed to be held jointly responsible for repaying the loan. That means the two of you, or either of you, can be held liable for the loan.

These are your options for addressing this issue…

  1. Retain the Original Mortgage

This option has the most risks.  Often those who don’t retain competent attorneys to help them with the divorce, or try a do it yourself divorce, end up going this route. The parties agree one spouse will live in the property and he or she promises to make payments.  The mortgage isn’t changed. This agreement between the parties may have seemed to make sense at the time. The spouse had a good job and the children, with enough stress in their lives, didn’t want to move. Things can change. Maybe the spouse lost his or her job, or changed his or her mind and decided the other spouse should start paying too.

Both parties could leave the home and rent it, in the hopes the rent will at least pay the mortgage and other expenses (maybe even turn a profit). The demand for rental properties is generally up and this may allow some time for the real estate market to improve. On the down side, you’ll be in business with your ex-spouse and your disagreements may continue. What happens if you can’t agree on who should be a tenant? If repairs and maintenance are needed, who will pay for them?

If either scenario goes sour, this can result in a mortgage default, a foreclosure and wreck your credit rating. It will also keep you tied to the ex-spouse you went to all that trouble to divorce. Maybe you have fallen into this option because the housing market is so bad you can’t sell the house for a reasonable price. Perhaps there aren’t any mortgage companies willing to write a mortgage for either of you individually. Is this situation guaranteed to fail? No, but it does carry the most risks.

  1. Sell the House

On paper, this is the simplest way eliminate the mortgage and all the financial baggage that comes with it.  Sell the house, use the proceeds to pay off the note and split whatever money is left over. When possible, get this done before the divorce is finalized. Hopefully, whatever differences you have with your spouse won’t prevent you from agreeing to a sales price.  Once the home is sold and the mortgage paid, you don’t have to worry about continuing to make mortgage payments, maintaining the house, paying taxes or insurance.

The ability to sell a house for a reasonable price depends on a number of factors, most importantly how desirable your home is and the real estate market where you live.  If your mortgage is “under water” the mortgage holder may or may not agree to a short sale.

  1. One Spouse Keeps the Home and Refinances the Mortgage

This may be a good option if the parties are in good enough financial shape.  The spouse wanting the house buys out the other spouse’s equity share and refinances the mortgage in his or her own name. If you’re the one keeping the home, have your spouse sign a quit claim deed which relinquishes his or her ownership and rights to the property. If you’re not keeping the home, the new mortgage needs to be in the name of the other spouse only. If your name is on it, and your ex-spouse defaults, you may be held responsible for it.

This option assumes the spouse keeping the house has the resources to buy out the other and can qualify for a mortgage on his or her own.

  1. One Spouse Keeps the Home and Assumes the Mortgage

This can be done depending on the type of mortgage, the mortgage holder and the financial shape of the spouse staying in the home. Not all mortgages are assumable, so the first step is to read the mortgage paperwork or contact the mortgage holder.

If it is assumable, the process starts with the spouse keeping the home filling out paperwork. The lender will want to see that past payments have been paid on time and in full and will need proof the spouse will can afford the mortgage payments. The spouse keeping the house needs to sign an assumption agreement and a release of liability. The spouse leaving the home will need to sign a quit claim deed. The lender may ask for a copy of that and the divorce decree. If this is all approved by the lender, it may issue a release of liability to the spouse leaving the house.

This may be the way to go if the mortgage can be assumed and an added benefit is the fees to assume a mortgage should be lower than re-financing and getting a new mortgage.

Mortgages are but one of many financial issues a divorcing couple needs to resolve.  These issues can be difficult to unwind, but it can be done with some research, planning and cooperation by both parties. If you have any questions about financial issues and divorce, contact our office.

What happens to the house following a divorce?

What happens to the house following a divorce?

The home that a married couple purchased and lived in during married life is usually the most significant asset, both financially and emotionally, that a couple must address during a divorce.  How do you decide what to do with the house?  There are many factors and issues that each spouse must evaluate before deciding what will happen with the family home.

Community or Separate Property

The question of who owns the home must be answered before determining what happens with the house.  In California, assets acquired during marriage are considered community property and will be divided equally in a divorce.  If a spouse bought the home prior to the marriage, then the home is presumed to be that spouse’s separate property.  However, the situation can become complicated if the other spouse makes mortgage payments for several years during a longstanding marriage.  The most straightforward situation is when the couple purchased the home during marriage with community property funds and both are on the title.

Options and Factors to Consider

If the home is community property, then there are three main options for what to do with the home:  maintain the current ownership/title; sell the home and split the proceeds; or “buy out” the other spouse.  Because the emotional and financial implications often hinder a couple’s ability to reach an equitable decision regarding the home, an already difficult decision becomes the most contentious aspect of the divorce.  Nonetheless, the home, just like other marital assets, can be part of the spouses’ agreed-upon separation of property and debts.

The financial reality and tax consequences may ultimately lead to a decision that neither spouse prefers.  Because emotional, practical and financial factors all impact the decision, both spouses must understand all the options and the implications before deciding what to do with the house. If the couple is not able to resolve the disposition of the home, then the judge will decide.     

Do we have to sell the house?

No.  If one spouse wants to remain in the house, then there are options.  When the couple has significant assets, the house may be awarded to one spouse and other assets of equal value to the other spouse.  Or, one spouse can “buy-out” the equity of the other spouse, basically purchasing the home from the other.

Who pays the mortgage?

Who pays the mortgage depends upon what the couple decides to do with the house.  If one spouse would like to remain in the home, then that spouse can assume the mortgage (if the bank allows) and the other spouse will be removed from the mortgage.  Another option is for the spouse remaining in the home to refinance the home in his name only.

If assuming the mortgage and refinancing are not options and the spouse living in the home cannot afford the payments, then the other spouse may agree to directly pay the mortgage, especially if there are children involved.   In some instances, if the spouse does not have sufficient income to make the payments, then the amount of the mortgage payment might be added to the alimony or child support payment.  These options can be problematic because if the mortgage payment is not made, creditors can attempt to collect from either party.

Is a quitclaim deed a good option for removing one spouse from title?

If one spouse wants to be removed from title, then a quitclaim deed can be utilized.  However, if both spouses are on the mortgage, a quitclaim deed does not remove that spouse from the mortgage and the bank can still attempt to collect from both spouses.

Is the custodial parent always awarded the house?

When deciding what happens with the family home, a court will always consider the best interests of the children.  However, there is not a presumption that the spouse with physical custody of the children retains the house.   The most practical decision is to give the home to the custodial parent, but the financial implications will be considered to be sure that the mortgage can be paid and that the other spouse is treated equitably.

In certain financial circumstances, the best option is to sell the home.  But, if that is not in the best interests of the children, the judge may determine—after looking at all factors–that a deferred sale is feasible.  In that case, the custodial parent and children may remain in the home for a period of time and defer the sale until a future date.

What if neither spouse can afford the mortgage payments after divorce?

If the couple cannot afford to maintain the mortgage following the divorce, then the home may have to be sold.  Hopefully, the home is worth more than what is owed on the mortgage.  If yes, then the couple can split the proceeds and each spouse proceed with obtaining replacement housing.  If not, then the couple has a difficult decision to make.

If the couple can afford to make-up the difference in what is owed on the mortgage, then they can sell the home, pay-off the mortgage balance and move on with alternative housing.  However, if they cannot afford to make-up the difference, then they will need to consider a short sale, or postponing the sale for a particular period of time.  Postponing the sale can be problematic if the couple cannot agree on who should make the mortgage payments or if the payments are not made.

Are there tax consequences with one spouse paying the mortgage?

Yes, there may be an issue with who may claim the mortgage interest tax deduction if one spouse takes over the mortgage, assumes the mortgage, or purchases the other spouse’s equity in the home.

What happens with the house after separation but before the divorce is finalized?

The period of time between the couple’s decision to separate and the final divorce order can cause complications with many financial aspects of a divorce, including the house and the mortgage payments.  Because this period of time can last several years, one spouse may want to sell the home while the other wants to keep it.  During this time, the court will freeze any such activity relative to the home, meaning neither spouse can sell or refinance without the other spouse’s and court approval.

It is important to note that just because one spouse is staying in the home during this period, it does not necessarily mean the court will award the home to that spouse.

Dividing Property and Debts in a Divorce

Dividing Property and Debts in a Divorce

When facing divorce, often times the most difficult and time consuming task for the couple is determining how to divide the property and debts.  If both spouses are involved and working toward a common equitable goal, then the division can be accomplished jointly and with less complication.  If the parties do agree on the separation of property and assignment of debts, it is very important to note that the division is not final until the judge signs the order.

In a divorce, each spouse retains his or her separate property and debts, while the community property and debts are divided between the spouses.  The first step is to make a list of all the assets, indicating value and whether the asset is separate or community property.  In California, assets and debts that are accumulated during marriage are presumed to be community property.  Separate property is that which the spouse owned before marriage or inherited or acquired by gift during the marriage.  If either spouse acquires property after the separation but prior to the final divorce order, the property is presumed separate property.  Unfortunately, separate property can inadvertently become community property if it is combined or “commingled” with marital property.

Once the asset list is created, how does the couple decide who gets what property?  Because the property should be divided fairly equally between the spouses, the couple has options:  they can assign certain assets to each spouse; sell assets and divide the proceeds; “buy out” the other spouse; or continue to own an asset jointly after marriage.  Owning property together after a divorce is not common, and when it occurs, it usually involves the family home and the desire to maintain stability for the children.  The couple must also assign all debts to each spouse, noting that the separation of debts is not binding on creditors, and therefore, they can attempt to collect the debt against either spouse.

If the spouses cannot agree on the division of property and debts, then the court must decide.  Mediation can be very helpful if the couple is unable to determine an equitable separation of property and debts.  Why would the couple be unable to reach agreement?  Complications may arise if the assets and debts are significant or evoke an emotional response, such as a family-owned business, a valuable retirement plan or pension, or a second home.  It can be very challenging to reach an agreement, especially if the divorce is already contentious.

Because some assets may appreciate or depreciate, be illiquid or difficult to sell, or have tax implications, each spouse should be aware of the financial and tax consequences of owning a particular asset.  If both spouses understand the implications of dividing the assets and debts, then they will be better equipped to amicably reach an agreement.

How to Divide Your Personal Property in a Divorce

How to Divide Your Personal Property in a Divorce

In a divorce, you and your spouse will need to divide up your combined personal property, including household furnishings and automobiles, equally — or as close to equal as possible. If you and your spouse plan to try to divide your property yourselves, here are some tips to get you started.

Steps to Take

The process of dividing your personal property in a divorce can be broken down into a few simple steps.

  • First, make a list of all of the items that you own.
  • Next, figure out which items are community property and which items are separate property. (The items that are categorized as community property will need to be divided, while each spouse will keep his or her separate property.)
  • Then, determine a value for each item that falls under the category of community property.
  • Finally, take turns stating which items you want from the list of community property until each spouse has reached half the value of the list.

Assigning Values to Your Household Items

The category of household items typically includes furniture, kitchen items, books, linens, and so forth. Dividing these items fairly between spouses can problematical, particularly since you have to put a valuation on each individual item or set of items.

Generally, the standard for valuing household belongings is the fair market value if you sold the item “as is” in its current condition. There are several ways to go about determining the fair market value of your belongings.

  • You can confer with your spouse and decide on a valuation for the items together.
  • You can look on Internet sites, such as eBay or Craigslist, to see what others charge for similar household goods.
  • You could also go to second-hand stores, such as Goodwill, and see how comparable items are priced.
  • Alternatively, you may hire an independent appraiser to set values for your household items.

Remember that most items decrease in value significantly after they have been purchased. That bedroom set that you purchased together five years ago for $2,000 is probably not worth a whole lot today, perhaps only a couple hundred dollars.

Tips for Dividing Up Certain Sentimental Items

Some items bring up more emotions than others and can be difficult to value and divide. For example:

  • Wedding gifts. Usually the easiest way for spouses to divide up wedding gifts is to agree to keep the gifts that were given by that spouse’s family or friends.
  • Photos. Often, both parties want to keep the family photos. If you both want the same photos, make copies and split the cost.
  • Other sentimental items. While other sentimental objects, such as your child’s artwork, do not have actual monetary value, deciding who gets what can be very upsetting for most parents. It is often best to simply take turns choosing among the items.

How to Assign a Value to Your Vehicles

Vehicles, as opposed to household goods, are considerably easier to value. This is because there are only a few variables that affect the value of a car, such as the exterior condition, interior condition, mileage, and mechanical condition.

The easiest way to value your vehicle is to refer to the Kelly Blue Book or the National Automobile Dealers Association (N.A.D.A.) Used Car Guide. You can find a version of these guides online at www.kbb.com and www.nadaguides.com, or you can purchase a copy of either guide from booksellers such as Amazon.com. If the guides provide different values, average the amounts and use that as the valuation.

One issue to note is that the Kelly Blue Book and NADA Guide do not take unrepaired mechanical problems into consideration when assigning a value to a vehicle. If you have a car with existing mechanical issues and want to determine the proper valuation, you can take the vehicle to a mechanic who will provide an estimate of what it would cost to repair it. Then, subtract the estimate from the vehicle’s value as stated in the guide before including it in the marital estate.

Items That Are Not Part of the Marital Estate (Separate Property)

Certain items are considered a spouse’s separate property and do not have to be valued or divided up in a divorce. For example, if your spouse received a piece of jewelry in 2010 from her mother that she always wears (say a diamond ring) and you were married in 2011, that ring would not be considered marital property. Rather, it is your spouse’s separate property because it was given to her exclusively, she received it before you were married, and it was kept separate.

In addition, some things that are acquired during the marriage may be considered separate property depending on where the money used to purchase the item came from. For example, if you inherit money during the marriage, then that money is your separate property. Also, whatever you buy with the inherited money becomes your separate property as well. Let’s say you inherit a large sum of money that you use to purchase a piece of undeveloped land in wine country. This would be considered your separate property.

When you are deciding if a particular item is community or separate property, look at the source of the money used to buy the item. (If you have any doubts or questions in this area, an Oceanside divorce attorney can advise you about which of your belongings are marital, and which ones remain separate.)

Disclosing Your Assets

In a divorce, each spouse must disclose all of his or her assets and debts (community and separate) to each other. The key thing to keep in mind is that you should be completely honest and be sure to disclose everything of value that you own. If you conceal anything, it will probably come out sooner or later and the penalties can be serious.

A divorce attorney can help you in determining a fair way to split your belongings. If you are considering divorce and want to learn more about how to value your assets or have any other questions pertaining to divorce, call the Oceanside divorce attorneys of Fischer & Van Thiel today at 760-722-7646.