Forward Thinking Family Law Since 1994

The Financial Crisis, Underwater Mortgages and Troubled Marriage

When O, the Oprah magazine, focuses on new trends in divorce and personal finance, you know that the trend is on its way to mainstream acceptance. (See "Divorce, Interrupted" in O, The Oprah Magazine, May 2009.) For many couples on the verge of divorce confronting today's harsh economic realities, the time is right to reconsider old notions of divorce as a "battle" to be played out a with maximum drama in a public courtroom. In any divorce, careful legal protection of the parties' interest is absolutely critical -- but there is no reason why legal "protection" must be needlessly expensive or damaging to families. It's becoming increasing popular to use legal methods that are smarter, more private and more effective.

Mediate First. The worldwide financial crisis has taken a huge toll on families' investments and home equity balances. The good news is that this may be the perfect time to rethink, as a society, how we handle troubled marriages and divorce. Mediation is gaining acceptance as the smarter, more responsible and more affordable alternative to traditional divorce proceedings (and the "battle" mentality).

Mediation (and another innovative family law process known as "collaborative practice") avoids wasteful and antagonistic litigation, getting straight down to the bottom line of producing a binding judgment without expensive court maneuvers. Mediation and collaborative practice allow couples to end their partnership in a responsible way, consistent with their core personal values while making careful financial decisions about their futures. The parties engage in the "heavy lifting" of hammering out an agreement with expert legal guidance without the gamesmanship or drama in the local court.

Sobering Statistics. One in two marriages ends in divorce. That's not a new development. What is new is that, now days, about one in five houses is burdened by an "underwater" mortgage. Combine a couple who cannot live together with a house that they can't get away from, and the popular media labels the result "too broke to divorce."

Can't Live Together/Can't Afford to Live Apart. When a separating couple cannot sell their shared home, they should establish binding rules about how they will live together, how they will share expenses and divide the profit (or loss) when their home is finally listed and sold. While emotions naturally run high when a family home is at stake, no one gains by leaving key financial decisions to snap decisions of a busy judge or to settlements haphazardly reached in the courthouse hall just moments before a case is called. Often decisions made under pressure like this come too late - and thousands of dollars in equity and opportunity are lost forever.

Addressing what to do about an "underwater" home is a perfect example of an issue best resolved by mediation. Almost always, the couple will be better off with a binding legal agreement that allows each of them to move forward with their lives and financial affairs with some degree of certainty. A solid agreement governing payment for the home expenses and the parties' personal finances removes one stressor from the relationship while giving the couple some breathing space to focus on their plans for the future and, especially, their children's long-term well being.

Cooperation During Divorce Usually Makes Serious Financial Sense. When a couple cannot continue to make house payments, they may face foreclosure - the outright loss of their house to the bank. This is where a cooperative, binding legal agreement between a couple and their lender may make all of the difference in their financial lives. When a home is lost to foreclosure, often the owners stand to lose even more than their equity. In today's real estate market, the couple might actually owe the bank money after the foreclosure- if the mortgage is worth more than the house itself. If the couple owes money even after the foreclosure sale, not only with their credit be badly damaged but they may face years of aggressive collection efforts as collection agents seek to recover the deficit owed to the bank. Even during a period of separation or divorce, couples can make smart, legally binding decisions that literally might save them thousands of dollars and help protect their financial future.

"Keys-For-Cash" and Debt-Free Short Sales Take Cooperation. When a home is at risk of foreclosure, it may be possible to work out a "debt-free short sale" arrangement with the mortgage holder - by working with the bank to establish a binding legal agreement that eliminates the prospect of collection actions on the deficit afterwards. It may also be possible to voluntarily return the home to the bank after foreclosure in a "keys-for-cash" transaction - where the bank actually may pay the former homeowners thousands of dollars to move out in an orderly fashion, keeping the property in good, clean condition up until the keys are turned in by an agreed date.

To structure debt-free short sales and "Keys-for-Cash" arrangement, homeowners must engage in a lot of legwork, planning and communication. It is imperative for couples to work together to enter into binding agreements with the lender and meet deadlines. If the couple is distracted by a battle in family court or if one party fails to live up the agreement the other has negotiated, the couple's resources will be depleted on two fronts. They may miss key deadlines and squander the opportunities to save a significant portion of their marital estate while facing years of avoidable collection action and expense.

Seek Legal Guidance Early. Regardless of your marital status, the experts say that, if you are facing foreclosure or have an "underwater" mortgage, there is good reason to take smart, positive action early. Even if your marriage is under stress, you do not have to stand still and allow worst-case scenarios to unfold. As the Oprah article encourages: see a mediator and get solid financial information right away. Start working on legally-binding agreements that secure the best possible future for yourself and your family.

Not every situation is suitable for mediation, but many of us in the helping professions would like to see the curtain begin to close on the assumption that, when a marriage fails, couples ought to brace for battle. The tide in popular thinking is beginning to turn. It is an encouraging sign that national media outlets, such as the Today show and even Oprah, are beginning to highlight smarter, more forward-looking strategies to address the personal and financial difficulties of divorce.

Even with expert professional help, divorce is a tough experience. By choosing to use mediation and collaborative practice techniques, it is possible for divorce to be an experience in which you can demonstrate to yourself -- and your children - that is possible to tackle difficult times in life with dignity. It is possible to make smart financial and personal decisions at the same time. As legal professionals committed to helping our clients build the foundation for their best possible futures, our firm is committed to exploring mediation and collaborative process as a preferred starting point whenever possible.

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