Prior to 2007, in a divorce situation, the division of the marital residence would often be based on how to distribute net proceeds from the sale of the home. The sale of the home would normally occur within a few months and before entry of a final decree. Now, however, consideration has to be given to that unfortunate scenario of how to divide responsibility for a short sale or a foreclosure. With those discussions come how to negotiate a short sale with the bank, how short sales may affect treatment of the mortgage, and whether a short sale will result in a forgiven balance, a separate debt, or a tax form showing the debt as income to the parties.
Negative equity may be further exacerbated if a closing on the sale of the home does not occur before a divorce decree. If you are divorced by still own property with your spouse, the title changes and your house can become security for the other person’s debt.
Working closely with a lender you trust, a real estate attorney, and your family law attorney can be beneficial to both home owners. A divorce may mean you are separated but a joint liability on a mortgage does not go away easily.