Divorce is usually difficult. Emotions run high and at the same time divorcing couples have the added problem of figuring out the property distribution. This is particularly challenging when the market is down. Divorce clients I have seen in the past year have lost 15-30% of their home value, leaving the equity slim to none…or worse, negative. During a down market no one wants to sell their house, often times their largest asset; many divorcing couples are opting to keep joint ownership, hoping the market will turn so no one “sells” during a down market.
What about the flip side? What happens if you buy your spouse out of the house during an up market and are suppose to pay them back later when the market has dived? A Seattle colleague of mine told me about such a case like that recently. Here is the scenario:
Wife, wanting to keep the children in the home, keeps the house and agrees to pay husband his portion of the equity in the house in 5 years. Wife thought she could pay husband his $100,000, half of equity at the time, easily…or so it appeared 5 years ago. Then along came the severe economic downturn and the house lost $300,000 in value, more than the original equity at the time of the divorce. Property settlements are final so wife still owes husband $100,000 for his portion of the equity in the house. If wife sells the house now, she will be lucky to break even, but she will still owe husband the $100,000. She has no other resources, he wants his money. Now what?
The lesson is that home ownership is an investment and as with all investments the value may increase but the value may also decrease, each situation has its risks and rewards and these need to be considered when negotiating your property distribution.
For some information check out: "Minimize the Financial Pain of Divorce" and "Should you Keep the House in the Divorce?"
Please let us know your thoughts!
~ Debra
1 comments:
This example of the wife owing money for which she no longer has equity in the house to cover, reminds me that one thing that is hard about agreements is that to a large extent they can always be renegotiated. Often the only way to enforce an agreement is to litigate it, and the cost of litigation is often more expensive than the amount owed. Add to this, the fact that all of a divorced couples has kids their money should be treated like it was the kids, it becomes quite ironic. First a couple gets very emotional and spends a lot of money negotiating a settlement, and then years later they realize that the only way they can enforce it is to go to court. So there they are back at square one - needing to negotiate with someone with whom they thought they were free from. In a recent post I think you used the phrase 'durable agreement.' I think that is a brilliant way to state a good first goal - each couple should create a durable agreement with as little expense as possible. In doing so they will be more flexible later when forced to understand their property settlement or parenting plan is not exactly enforceable. I am thinking that examples of this are also: when someone looses the income that necessitates transfer payments; or they do not have the income to help pay for college as outlined in their property settlement. Isn't the person who feels entitled to these payments often told by their attorney to let it go because the cost of collecting would be more than the amount of collecting it? How often does this happen?
As a counselor, my role is that for about a hundred dollars an hour (often covered by health insurance) I can help a couple focus on the real issues, heal the anger and come up with what will serve them and their kids (if any) long term.
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