Going through a divorce is hard. It gets even harder when you have a house that is worth less than what you owe on it. This blog post will help you understand what happens in this tough spot and what you can do.
What Does It Mean When a House Is “Upside Down”?
An Upside-Down House: An “upside-down” house means you owe more money to the bank for your home loan than the house is worth right now. If you sold the house, you would not get enough money to pay back the whole loan. This can make splitting up property very difficult.
The Money Left Over: The amount of money you still owe the bank after selling the house is called a “deficiency.” For example, if you sell your house for $100,000 but you still owe the bank $130,000, you have a $30,000 deficiency. The bank will still want to be paid this money.
Ways a House Can Be Upside Down
- The Market Drops: Sometimes, home prices in an area go down. This can happen to a whole town or city.
- The Loan Is Big: If you borrowed a lot of money to buy the house, it can be hard to catch up.
- The House Needs Work: If the home is old or needs fixing, it might not sell for a high price.
Things That Affect House Value
- Location: The neighborhood your house is in makes a big difference.
- Condition: A house that is clean and well-kept will be worth more.
- Size: The number of bedrooms and bathrooms can change the price.
A Real-Life Story: Tom and Jane bought a house for $200,000. A few years later, they decided to get a divorce, but the house was only worth $170,000. They still owed the bank $190,000, so their house was upside down by $20,000.
How Is the House Debt Handled in a Divorce?
Debt From the Marriage: When you are married, the debts you both get are usually shared. The money owed on a house bought during the marriage is seen as a shared debt. This means both people are responsible for paying it back.
Splitting the Debt: The court will decide how to split this debt. Most of the time, the debt is split evenly between both people. So, if there is $30,000 left to pay the bank after selling the house, you and your ex-spouse might each have to pay $15,000.
Who Is Responsible?
- Both Names on the Loan: If both of your names are on the home loan, the bank can ask both of you for the money.
- The Divorce Order: The judge’s final order will say who has to pay what part of the debt.
- Protecting Yourself: It is important to make sure the divorce papers clearly state how the debt will be paid.
How the Court Decides
- Fairness: The judge tries to split all property and all debts in a way that is fair to both people.
- Each Person’s Income: The court may look at how much money each person makes when deciding who pays.
- Other Property: If one person gets more property, they might also get more of the debt.
A Real-Life Story: In their divorce, a judge told Mark and Sue to sell their upside-down house. They owed $20,000 after the sale. The judge ordered them to each pay the bank $10,000 to cover the rest of the loan.
Who Does the Bank Go After for the Money?
The Bank’s Goal: The bank loaned you money to buy the house and they want to get that money back. The bank does not care that you are getting a divorce. They will try to collect the full amount owed from anyone whose name is on the loan papers.
Both People Are on the Hook: Even if your divorce order says your ex-spouse has to pay the whole debt, the bank can still come after you if your name is on the loan. If your ex-spouse does not pay, the bank will ask you to pay. This can hurt your credit score if the payments are missed.
What the Bank Can Do
- Call You: The bank will call both of you to ask for the money.
- Send Letters: You will get letters in the mail saying you owe money.
- Go to Court: If you do not pay, the bank can take you to court to get the money.
Protecting Your Credit
- Pay on Time: Make sure payments are made, even if you have to pay your ex-spouse’s share for a short time.
- Talk to the Bank: Let the bank know what is happening and see if they can work with you.
- Get It in Writing: Always get any deals with the bank in writing so you have proof.
A Real-Life Story: Sarah’s divorce order said her ex-husband had to pay the $10,000 left on their house loan. He stopped paying, so the bank started calling Sarah. She had to work with a lawyer to figure out how to handle the bank and her ex-husband.
Is It a Good Idea to Sell the House Right Away?
Selling Quickly: Many times, people need to sell the house fast during a divorce. You may need the money or you may not want to live in the same house. Selling quickly means you find out exactly how much debt you will have to split.
The Problem with a Quick Sale: If the house is upside down, a fast sale locks in your loss. You will have to face the debt right away. Sometimes, waiting for the housing market to get better could mean you lose less money, or maybe even no money at all.
Reasons to Sell Now
- Need the Money: One or both of you might need cash to start your new lives.
- Stop the Fighting: Selling the house ends one of the biggest things couples fight about.
- Move On: It can help you both feel like you are moving forward with your lives.
Reasons to Wait
- Market Might Improve: House prices could go up in the future.
- Save Money: You might avoid having to pay the bank a large amount of money.
- One Person Stays: Maybe one person can afford to stay in the home and wait for a better time to sell.
A Real-Life Story: David and Lisa had an upside-down house. They decided to sell it right away because they could not agree on anything. They ended up owing $40,000, which they split, but they were glad to be done with the house.
Could Waiting to Sell the House Be a Better Choice?
Hoping for a Better Market: Sometimes, holding onto the house is a smart move. If real estate experts think home prices will go up soon, waiting could save you a lot of money. The house might not be upside down in a year or two.
Who Can Afford to Wait?: This choice is not for everyone. One person has to be able to pay the monthly house payment, taxes, and upkeep alone. If a foreclosure is close, you might not have time to wait for the market to get better.
Things to Think About Before Waiting
- Can You Pay?: Make sure one person can really afford all the house bills.
- How Long to Wait?: Talk about how long you are willing to wait for the market to change.
- Get an Agreement: Write down who pays for what and how you will split the money when you do sell.
Risks of Waiting
- Market Could Worsen: There is no promise that house prices will go up. They could go down even more.
- House Needs Repairs: Something could break, like the roof or furnace, costing a lot of money.
- Future Fights: You and your ex-spouse will still be tied together through the house, which can lead to more fighting.
A Real-Life Story: When Maria and Ben got divorced, they chose to let Maria live in the house for two years. She paid the bills, and they hoped the value would rise. After two years, they sold it and broke even, avoiding any extra debt.
What If the Bank Forgives the Leftover Debt?
When Banks Forgive Debt: Sometimes, a bank might agree to let you off the hook for the money you still owe after selling the house. This happened more often during the big housing crisis years ago. This is not something that happens all the time.
Making a Deal with the Bank: A bank might forgive the debt if you agree to give them the house in a clean and good state. This saves the bank the cost and trouble of a foreclosure and having to fix up a damaged home. You have to ask the bank for this kind of deal, known as a “short sale.”
Why a Bank Might Agree
- Saves Them Money: Going through a full foreclosure is very costly for a bank.
- Less Time Wasted: A deal can be much quicker than a long court process.
- You Cooperate: If you work with them, it makes the whole thing easier for everyone.
How to Ask for Forgiveness
- Write a Letter: Explain your situation and why you cannot pay the full amount.
- Offer a Clean House: Promise to leave the house in good shape.
- Get Help: A lawyer or a real estate expert can help you talk to the bank.
A Real-Life Story: The Chen family had to sell their home for $50,000 less than their loan. They talked to their bank and agreed to move out quickly and leave the house perfect. The bank agreed to forgive the $50,000 they still owed.
Are There Problems if the Bank Forgives the Debt?
A Surprise Tax Bill: This is very important to know. If the bank forgives a debt, the government might see that forgiven money as income for you. This means you might have to pay taxes on the money you did not even receive.
How It Works: Let’s say the bank forgives the $30,000 you still owed on your house. The bank might send you a tax form called a 1099-C. This form tells the IRS that you “received” $30,000 of income, and you may have to pay taxes on it, which could be thousands of dollars.
Who to Talk To
- A Lawyer: An attorney can tell you if this tax rule applies to your case.
- An Accountant: A tax expert can help you figure out how much you might owe in taxes.
- The Bank: Ask the bank if they plan to send you a 1099-C form for the forgiven debt.
How to Prepare
- Ask Questions First: Before you agree to any deal, find out about the tax rules.
- Save Money: If you think you might get a tax bill, try to save some money for it.
- Look for Exceptions: There are some special rules that might mean you do not have to pay the tax.
A Real-Life Story: After their bank forgave a $20,000 debt, Tim was shocked to get a tax bill for almost $5,000. He did not know about this rule and had to find a way to pay the IRS. Talking to an accountant first could have helped him prepare.
Why Is Talking to a Lawyer and Accountant So Important?
Getting the Right Advice: Dealing with an upside-down house in a divorce is very complex. A lawyer can help you understand the law, and an accountant can help you with the money and tax parts. Trying to do this on your own can lead to big mistakes. Our team of Michigan family law attorneys can guide you.
What a Lawyer Does: A lawyer will look at your case and help you make the best plan. They will talk to your ex-spouse’s lawyer and the bank. They will make sure your rights are safe and that the final divorce papers are written correctly to protect you in the future.
A Lawyer Can Help You
- Understand Your Choices: They explain things in a way you can understand.
- Talk for You: They can speak to the bank and others on your behalf.
- Protect Your Future: They make sure the final deal is fair and legal.
An Accountant Can Help You
- Explain the Taxes: They will tell you about any taxes you might have to pay.
- Plan Your Money: They can help you make a budget for your life after divorce.
- Find Problems: They can spot money issues you might not see.
A Real-Life Story: When facing a tough divorce with an upside-down house, Brenda hired a lawyer and an accountant. Her lawyer got her a fair deal with her ex-husband, and her accountant found a way to avoid the big tax bill on the forgiven debt. This team approach saved her from a lot of stress and money problems.
How Do We Figure Out the House’s Real Value?
Getting a Fair Price: To know if your house is upside down, you first need to know what it is worth. You cannot just guess or use a number from a website. You need a real, professional opinion to make good choices.
Using an Appraiser: The best way to find out the value is to hire a licensed home appraiser. An appraiser will look at your house, its condition, and the prices of similar homes sold nearby. They will give you a written report with the official value of your home.
Ways to Find the Value
- Hire an Appraiser: This is the most accurate way and is often required by the court.
- Ask a Real Estate Agent: An agent can give you a good idea of the price based on the current market.
- Look at Similar Homes: See what other houses like yours in your area have sold for recently.
Why an Accurate Value Matters
- Know Where You Stand: It tells you exactly how much debt you are dealing with.
- Helps in Talks: You can use the appraisal report when talking with your ex-spouse and the bank.
- Court Needs It: A judge will want to see a real appraisal to make a fair decision.
A Real-Life Story: Kevin thought his house was worth $250,000, but his wife thought it was worth $220,000. They hired an appraiser who valued it at $230,000. This fair number helped them agree on how to handle the debt and move forward.
What Should We Know About Foreclosure?
What Foreclosure Means: Foreclosure is what happens when you stop making your house payments and the bank takes the house back. This is a very serious thing that can hurt your credit for a long time. It can make it hard to rent an apartment or get a loan in the future.
Avoiding Foreclosure: During a divorce, it is very important to keep paying the house loan if you can. If foreclosure is about to happen, you have fewer choices. You may be forced to sell the house for whatever you can get, which could be a very low price.
Steps in a Foreclosure
- Missed Payments: It usually starts after you have missed several monthly payments.
- Bank Notices: The bank will send you letters telling you that you are behind.
- Court Action: The bank will file papers with the court to take the house.
Problems Caused by Foreclosure
- Bad Credit: A foreclosure stays on your credit report for seven years.
- Losing the House: You will be forced to move out of your home.
- Still Owe Money: Even after the bank takes the house, you might still owe them money.
A Real-Life Story: During their messy divorce, both John and Amy thought the other was paying the house loan. They both stopped paying, and the bank started a foreclosure. They had to rush to sell the house for a very low price to avoid having the foreclosure on their credit records.
For a deeper look into this topic, watch our detailed video on what happens when a house is worth less than the mortgage. Understanding how to handle these financial challenges is a key part of the divorce process. You should also learn more about key topics like deciding when to sell the marital home and understanding what happens to marital debt during a divorce.
Extra Insights
Thinking Ahead: It is always best to face money problems head-on. Do not ignore letters from the bank or pretend the debt is not there. The sooner you and your ex-spouse make a plan, the more choices you will have.
Working Together: Even though you are getting a divorce, try to work with your ex-spouse on the house issue. Fighting will only make things cost more and take longer. A good lawyer can help you talk things through calmly and find a solution that works for everyone.
Frequently Asked Questions
What is marital debt?
Marital debt is any money that a couple borrowed while they were married. This includes car loans, credit card bills, and the loan on a house.
Can one person be forced to pay all the house debt?
A judge might order one person to pay more if they make a lot more money. But the bank can still ask both people for payment if both names are on the loan.
What is a short sale?
A short sale is when the bank lets you sell the house for less than you owe on the loan. The bank often agrees to this to avoid a costly foreclosure.
Will a short sale hurt my credit?
Yes, a short sale can lower your credit score, but it is usually much less damaging than a foreclosure. It shows that you worked with the bank to solve the problem.
Can I keep the house if it’s upside down?
You can, but you would have to pay the house loan on your own. You would also be responsible for the “upside-down” part of the loan.
What happens if we can’t agree on what to do with the house?
If you and your ex-spouse cannot agree, a judge will decide for you. The judge will likely order you to sell the house and split the debt.
Does filing for bankruptcy help?
Bankruptcy is a serious step that can get rid of some debts, but you should talk to a lawyer first. It has long-term effects on your credit and finances.
How long does it take to sell a house in a divorce?
The time it takes can be very different for each case. It depends on the housing market in your area and how well you and your ex-spouse can work together.
Who pays for house repairs while we are trying to sell it?
This is something you and your ex-spouse need to agree on. The costs for repairs are often split, or one person pays in exchange for something else.
Can my ex-spouse refuse to sell the house?
If a judge orders the house to be sold, your ex-spouse must follow the order. If they refuse, they can get into legal trouble.
What if I want to buy my ex-spouse’s share of the house?
You can do this by refinancing the home loan in your name only. But you must be able to afford the full payment and the shared debt on your own.
Do I need a special real estate agent for a divorce sale?
It can be helpful to use an agent who has worked with divorcing couples before. They understand the extra stress and communication that is needed.
Dealing with an upside-down house during a divorce in Michigan can be confusing. The team at Goldman and Associates is here to help you understand your choices and find the best path forward. Our experienced Michigan divorce attorneys can provide the support you need.
Contact us today for help with your case.
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Website: Visit ChooseGoldman.com