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What happens to underwater mortgages in a divorce?

One of the unhappy surprises in a divorce can be learning that there is no equity in the marital home. But it's even worse to discover there is more owed on the property than it is worth, a condition known colloquially as being "underwater."

Both parties are entitled to a portion of any of the home's equity, just as both are liable for the mortgage. With underwater properties, even if one spouse manages a refinance of the mortgage in his or her name only, they only encumber themselves without benefit of an asset to offset their debt.

In any case involving property to be split, an appraisal is necessary to determine its worth. Courts may require one, but even when the couple is negotiating their own terms, it is vital to have an up-to-date appraisal done before beginning negotiations.

One solution when no equity is present is to sell the property and satisfy the mortgage. One spouse taking on all the debt is generally not the most equitable solution, but might be a choice he or she will consider. It's a bit of a gamble on the real estate market of the future -- properties may appreciate considerably and net one partner a tidy windfall later. But a bottomed-out real estate market could leave them a real white elephant on their hands just as easily.

In order to offset deficit liability for one spouse taking on the mortgage for an underwater property, they can receive other marital assets. Another way to compensate is if the one walking away from the property agrees to encumber him or herself financially in half the amount of the deficit. Upon later sale, both would have to pony up their portion of the difference owed to the bank.

Complex asset division is often better left in the hands of seasoned legal professionals, who understands the ins and outs of the process.

Source: Zacks.com, "Divorcing With a Home With No Equity," Beverly Bird, accessed April. 17, 2015

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