Finding the Upside on an Upside Down House

By | January 22, 2011

As I write this article, the economic recovery still stubbornly refuses to materialize.  Real estate markets across the state and the nation have fallen precipitously leaving many divorcing families with the difficult issue of what to do with a house with negative equity.

Selling the house may expose parties to a deficiency judgment (depending on the kind of loan on the house), and a short sale may also present the same risk.  Bankruptcy is an option of last resort for some people, and parties may or may with to take that step.

Another conundrum is the issue of whether to uproot the children that the parties may have.  Divorce is upsetting enough for children, and often parents want to maintain as much stability in the family as possible during the pendancy and aftermath of a divorce.  Though there may now be two different households, if the parties can afford to keep the residence, at least one of the households will be the familiar place the children call home.

In a litigated divorce, parties sometimes request a “Duke” order, named after the case of the same name.  A Duke order requests that the family home be sold at some future time so that the children may continue to live in the family residence, usually for reasons of emotional stability.

In a mediated divorce, parties can agree to essentially do the same thing.  That is, to delay the sale of the family residence until some future date while allowing the children and custodial parent to continue residing in the family residence.  In this way, the parties can do what is arguably in the best interests of their children –remaining in the family home– while deferring and possibly avoiding taking a financial loss on the sale of the family residence.  If the parties anticipate a gain in the future, the buyout could be deferred.  Or if they expect a loss, at least it can be deferred until a time when (presumably) both parties are in better financial shape to absorb the loss.

Assuming that the parties can come to some agreements regarding the maintenance of the property and servicing the loan, the delayed sale of an upside down house may be a wise financial move for divorcing couples.