When Hard Times Get Harder: Divorcing with an Upside Down House
Domestic attorneys have begun to see the same general problem day in and day out: A once happy couple gets married, buys a house, starts their family, and then hard economic times hit. Maybe one spouse loses their job or the family’s adjustable rate mortgage adjusts to a dramatically higher rate. The bills begin to mount and stress takes a toll on the marriage. Perhaps the couple realizes something needs to change, so they decide to take a line of equity out on their home. Time passes and that money disappears, but the marital problems do not. The once happy couple decides to divorce. Now they have to figure out how to deal with a house that has more debt than value.
It is a grim picture that has become increasingly common recently because of the increased unemployment rate and the decline in real estate values. In May of 2009 Florida had 943,000 jobless out of a workforce of 9,232,000. That is a 10.2% unemployment rate. The national average was .8% less at that time.
Florida has been relatively consistent about amplifying the national unemployment trends over the past decade. When unemployment was down nationwide, it was further down in Florida. Now that unemployment is up nationwide, it is further up in Florida.
Florida’s counties have had polarized responses to the economic changes. Flagler County has the unfortunate accomplishment of achieving the highest rate of unemployment for May 2009 with a 14.4% unemployment rate. Conversely, Liberty County maintained a stellar 5.0% unemployment rate. In the midst of this polarization Central Florida represents a middle ground for the state. Counties such as Orange, Osceola, Seminole, and Lake ranged from 9.6% to 10.8% unemployment.
While this economic downturn has been publicized for some time, it has most visibly manifested itself in a tangible manner over the past year. Comparing May of 2008 with May of 2009, Florida has over 400,000 more jobless people in its workforce, and Orange County’s unemployment rate increased from 5.1% up to 10.2%.
During this time of rising unemployment, housing values have plummeted. The statistics paint a scary picture. Roughly 100,000 homes in the Orlando area depreciated 12.6% from mid 2008 through mid 2009. Zillow.com reports a 23.0% depreciation. In addition, 9% of homes in the area are now vacant. It seems you can’t walk more than a residential block before seeing a “˜for sale’ sign.
The drop in home values combined with the prior stream of easy credit has resulted in little or no home equity for the average family. Just a few years ago a house represented a typical family’s largest asset. Now 10.3% of homes nationwide have no equity or negative equity.
If you are in the process of divorcing, the reality of the situation is actually far worse than these figures indicate. Even if you are fortunate enough to have a home with some equity on paper, you may still be in a difficult situation. Should you try to sell the home, you will face intense competition from desperate neighbors, short sales, foreclosure sales, and an insufficient amount of buyers. Another important consideration is the costs associated with selling a home. Realtor’s fees generally run about 6%, closing costs could be another 3%, and necessary repairs and clean up to make the home presentable for sale may be in excess of 1%.
These facts are dreary, and the reality is harsh, but things only get worse when families compound their problems by making bad decisions. Too many people simply give up. They do not get the information they need to help themselves through this process.
There are many horror stories. Many people have the misconception that if their spouse simply provides them with title to the house that they will somehow be relieved from the joint mortgage and note. They suffer the effects of this misconception when they go out to buy a new home and cannot qualify due to their existing obligation, or worse when their former spouse has defaulted on the mortgage and they are served by the mortgage holder with foreclosure proceedings.
Other people have made the mistake of believing that a Final Judgment of Dissolution of Marriage that requires one party to be responsible for the mortgage obligations is sufficient to terminate the creditor’s rights. However, when the creditor is not a party to the action, the creditor’s right to collect on a joint debt is not limited by the court’s assignment of the debt to one party. Thus, a spouse may get a call from a creditor seeking to collect sums owed years after the divorce was finalized. Without legal advice many people will never have considered that exclusive use and possession of the home by one spouse can be an element of child support, or that alimony can be paid in lump sum with or without tax consequence, or that retirement accounts such as 401K’s can be divided.
Despite the economic conditions and the seemingly endless potential for inflaming a bad situation with worse decision making, there is a silver lining. People who find themselves in these situations have more resources now than ever before.
The federal government has allocated enormous amounts of money to assist in just these sorts of situations. In addition to governmental programs, many lenders have internal programs that allow for the borrower to modify loans. Many domestic attorneys have become familiar with these programs and can assist clients in looking at options.
Families can avoid many problems by understanding all of their options and making informed decisions. The husband and wife each need to have an independent financial plan for the future. Any dissolution of marriage should address all of the issues arising from the marriage in a way that coincides with the parties’ respective plans.
This can be achieved by each party looking at their goals with an attorney who has experience with these situations, and investigating their options for achieving those goals. Hard times demand sound decision making, and it is simply not possible to make good decisions without all of the information. The information is available, and the price of the information is usually far less than the cost of not having it.
Andrew Windle, Esq.- Associate Attorney at DeWitt Law Firm, P.A.
Sherri DeWitt, Esq.- Managing Partner of the DeWitt Law Firm, P.A.
Both can be reached by phone at 407.245.7723, by email at email@example.com, and by mail at 37 N. Orange Ave., Suite 840, Orlando, FL 32801