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Facing Foreclosure in Divorce, Short Sales Can Help

For a couple going through a divorce, the emotional stress they face is exasperated when the house they own as a married couple is “underwater.” When a property is referred to as “underwater,” it simply means that the house’s mortgage exceeds the current value of the property. There are various options to consider and avenues to explore before deciding how to deal with an “underwater” property.

How Deep Are You?

The first thing the spouses will want to do is determine what the current value of the home is compared with its debt. This should be done outside of the courts but with the help of a real estate attorney or a reputable realtor. If the couple can agree on the value, there is no need for individual appraisers, unless the case proceeds to litigation. In that case, each party may want to hire their own appraisers. After the value of the house is agreed on, the couple needs to assess the liens on the property.

Should I Stay or Should I Go?

The next thing that should be determined is if one of the spouses would like to remain in the property. This is especially important if there are school age children that would like to remain in their school districts. An important question presents itself: Can one or both of the spouses afford to pay for the debt service on this property? Another question is if there are other residences in the school district which are available and maybe more affordable.

If one of the spouses does agree and can afford to stay, there should be provisions on how to divide equity in the marital home once the property appreciates in value. There should be wording in the divorce settlement agreement on who pays the mortgage, how it should be split, who pays which maintenance on the property and even the date when the house will be put on the market. For example, the parties could agree to put the property up for sale after the youngest child graduates from high school.

Short Sale Option

One option may be for the couple to consider a “short sale”. In today’s economy, and in light of today’s real estate crisis, there are many lenders who will accept a “short sale” instead of moving forward with the cost and the long and expensive process of foreclosure. A “short sale” is when the bank is willing to accept a buyer for the property for a price that is less than the current mortgage. Many banks will agree to do this instead of taking ownership of the property, which is what they would do in the case of foreclosure.

Qualifications for a Short Sale

There are generally three qualifications for an owner to be approved for a short sale: 1) the home’s market value has dropped, 2) the mortgage is in or is near default status; and 3) the seller/owner has fallen on hard times. The seller must submit a letter of hardship explaining why he or she has stopped making mortgage payments and why he can’t pay the difference between the sale price and the debt owed. Examples of hardship include divorce, unemployment, medical emergency, bankruptcy or death.

While the spouses may relieve themselves from paying the majority of the debt obligation, they may still have to deal with the remaining debt that the sale didn’t cover. There is also the matter of how that debt will be split between the parties. This issue should be negotiated outside the courts in an amicable way since the courts may make the decision to split the debt equitably.

Many banks and various programs are available that will forgive some or all of the debt owed on the property which is why it is important in our area to contact our Burlington County short sale lawyer to ensure comprehensive legal representation in this matter.