House Underwater? Court May Force you to Work it out with your Ex.

In strong economic times, divorce cases are often litigated over the division of assets.  Parties spend thousands and thousands of dollars arguing over who gets the house, the car, or even the family dog.  In more difficult economic times like those we are experiencing today, parties and their attorneys have to pick their battles carefully in order to limit the costs of litigation.  And when deciding whether something should be litigated or settled, they also may need to get creative.

In no circumstance is this more true than with respect to the division of marital debt; particularly debt from the purchase of a home.  Following the bursting of the real estate bubble, countless families have found themselves underwater on their mortgages.  In other words, the amount they owe on their mortgage is more than the house is worth.  This is not a problem if the owners of the home intend to stay together and remain in their residence (as long as they can make their monthly mortgage payments).  But when two parties wish to divorce, apportioning this debt can be very difficult.

The Virginia Court of Appeals recently took up the issue of apportioning “residential debt” in the case of Fox v. Fox.  In this case, the Court of Appeals upheld the lower Circuit Court’s decision to decline to divide or allocate two parcels that were “underwater.”  The Appeals Court affirmed that Virginia Code §20-107.3 (C) is “permissive,” rather than mandatory.  In other words, after reviewing all of the relevant factors under the statute with respect to equitable distribution, the Circuit Court had the discretion to decline to do anything with the two pieces of property.

As a practical matter, this was probably not a satisfactory result for either party.  Following the entry of their divorce decree, the parties retain ownership of the properties “as tenants in common, subject to foreclosure or sale.”  The parties may well have worked something out following the decree to avoid this (or they may be in the process of doing so as of the time of this writing), but had they been able to anticipate the Court’s treatment of these particular properties, they may have been able to save some legal expenses along the way.

Life Lesson: When dealing with the issue of marital debt, it is probably best for the parties to work it out as best they can—if not, the courts may force them to do so anyway!

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