Splitting The House During a Divorce In a Recession

Besides income and expenses, the house is another issue that sometimes has some aberrant circumstances in this recession.  During a “normal” economy, it’s pretty common for divorcing families either sell the home or one of them continues to live in it.  Seems pretty straightforward.  If neither of the spouses wants to stay in the house or can afford it, the house is sold.  Since the house is one of the biggest assets for the family, it can sometimes be tricky even in normal times.

But these are not normal times.  Money stress seems to be bringing more people to seeking divorce as a solution.  And for many of these families, their house is “underwater”, meaning they owe more than the house will currently sell for.  Some people see their investment and retirement accounts worth less than they put in, but they don’t owe more than the account balance.  So the house is treated more like a liability in the financial settlement.

I generally advise people going through divorce to make decisions they’ll be comfortable with going forward.  It’s often difficult to see past the terrible pain (and sometimes anger) that drives what someone in the midst of a divorce thinks they want to do.  So long term decisions are important.

In that vein, it’s difficult sometimes to avoid what is sometimes referred to as the “recency effect”.   That’s acting as if everything will continue to be the way it has been recently.  Even the doom sayers don’t assume the recession will go on forever.  So it’s reasonable to expect that in the foreseeable future real estate markets will be better than they are now.  Sometimes the answer is a temporary one that allows both spouses to move forward and offers as little disruption as possible to the children.  One spouse stays in the house with the kids and pays the mortgage until the house has enough equity to make a sale at least a break even proposition.

Sometimes the spouse that doesn’t take the house feels like it’s a raw deal because the house will be worth so much more in the future.  That’s true of any of the marital assets.  An investment account may go up – or down – in value and the one who takes it has to have the patience (and in the case of the house, the funds) to wait and hope for better days.

In a worst case, the house might have to go into foreclosure or a short sale.  This is an environment where some people will end up with this terrible situation that wouldn’t under normal circumstances.  But that doesn’t mean it should be taken lightly.  That is a negative impact that will be reflected on the credit of anyone on the mortgage for several years.

About the author

Linda Y. Leitz, CFP®, EA, CDFA

Linda Y. Leitz is a fee-only Certified Financial Planner™ and has been in the financial industry since 1979. She is also enrolled to practice before the Internal Revenue Service. Before becoming a financial professional, Linda held several executive positions in the banking industry. She began her career as a bank examiner. Linda has a BBA in Business Administration from Principia College and an MBA from Southern Methodist University.
As a fee-only financial planner Linda is a member of the National Association of Personal Financial Advisors, the Financial Planning Association, the National Association of Tax Professionals and the Alliance of Cambridge Advisors. As a leader in the financial planning industry, Linda is the author of the book titled "The Ultimate Parenting Map to Money Smart Kids". She has been quoted in several national publications including the Wall Street Journal, U.S. News and World Report, and Morningstar Advisor and she has appeared on CSNBC. She also works as a volunteer instructor to new financial advisors with the Alliance of Cambridge Advisors.

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