Divorce and Money: Splitting the Assets

Allison Gervais

If money is a problem in your relationship, it’s probably going to become an even bigger problem with divorce. 

What if more money is owed on the house than it is worth? What about retirment accounts?
 
by Allison Gervais
Sr. Mortgage Loan Consultant

Your Home Value is Upside Down and You’re Divorcing…Now What?

You’re in the midst of a divorce and the value of your home is less than your mortgage.  How do you navigate thru these troubled financial waters?

One of You Keeps the House

If one of you wants to keep the house, remember banks rarely allow a person to take his/her name off the loan, thus relieving them of any financial responsibility.  The standard way this is completed is through a refinance. 

Sell the House

If you both decide to sell, the only option  available (in this case) is if the bank is willing to participate in a short sale.  A short sale means the bank will accept less money than the balance of the mortgage due to a decline in value.  This option leaves both owners without any cash from the sale and also having to find a new place to live. 

If you’re the one who wants to move out, consider the risk of leaving your name on the mortgage.  If your ex misses even one payment, it will ruin your credit.  You will also have a harder time obtaining other credit if you have the mortgage responsibility PLUS your new living expenses since the mortgage will remain on your credit as an obligation. 

Wait for the Value to Increase before Selling

Another option is waiting until the value increases before selling.  This gives you the possibility of higher proceeds to share upon a later sale date.  The two of you would need to decide who lives there (you could even rent it out) and how the mortgage gets paid.  It’s a matter of deciding if you want to cut your losses now or stick it out for the market to turn around.  There is also a moral decision as short selling or foreclosure allows you to walk away from an obligation you originally agreed to pay. 

What about our Retirement?

Divide  Retirement Assets without Liquidating

Another point to consider is that retirement accounts like 401(k)’s and pensions do not have to be liquidated to be split.  In fact, closing or pulling money out of these accounts early will almost always land you with administrative charges, penalties and a load of deferred taxes. 

A much smarter option is to divide the accounts via a Qualified Domestic Relations Order (QDRO).  This order will segregate the funds in the account between you and your ex, while leaving the money where it is.  Once the QDRO is entered and approved by the pension company, you will each own a separate part of the account. 

You can each independently withdraw money if you have to (but will have to pay penalties just as if you were not getting divorced). Or just leave the account intact in the expectation that the value will increase when the economy improves.  Some people make the mistake of just keeping their individual accounts and the person with more transferring over the difference.  All accounts are not the same and you could end up with a lesser performing fund. 

Talk to a CDFA (certified divorce financial analyst) or Financial Advisor for advice, not just your attorney.  If you were not in control of your financial situation during your marriage or feel lost with getting back on your feet, a Divorce Coach can help you budget and map out a plan through the process, saving you money on attorney fees.  You don’t have to do it alone!

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Tags: family, Home, Marriage, Money, relationships, wealth

Category: Your Finances