Property values crashed in 2008 and they have not fully recovered for many in Topeka and neighboring communities. In some cases, it may be almost impossible to sell a home for an amount that will pay off an existing mortgage. If you are considering divorce, you have options for dealing with an underwater mortgage.
In this post, we will discuss three of them. Your individual circumstances will affect which might be right for you.
Filing a joint bankruptcy
Job loss and illness are two factors that can stress a relationship and place broader financial burdens on a family. If the underwater mortgage is just one of many debts, you may want to consider bankruptcy.
Filing a joint bankruptcy petition may be a solution. It could resolve one significant divorce issue: debt division. It would also ensure you are not at risk if your ex-spouse fails to remove you from the mortgage and later defaults. Once your divorce is final, you no longer have the option to file jointly.
An individual bankruptcy filing is always better when cooperation has completely broken down. Seek the counsel of an attorney who understands the interplay of divorce and bankruptcy on timing issues related to Chapter 7 and divorce.
Credit for negative equity
When one spouse wants to stay in the home and can afford the mortgage payments, a set off is another option. An appraisal will show how underwater you are on the loan. Then factor this negative equity into the property division.
But if you do not keep the home, protect yourself by requiring your soon-to-be ex-spouse to remove you from the mortgage.
Agreeing to a "short sale"
Selling the property is another solution when neither of you wants to be saddled with the underwater mortgage. A short sale (sale of property as a loss) generally requires lender approval. A short sale will damage your credit, but not as badly as a foreclosure. You each need to sign paperwork, so you must be able to work together.
When considering how to best deal with an underwater mortgage speak with a knowledgeable attorney about your unique situation.