Question
My husband and I decided 6 months ago to get divorced. Since then he has started dating and now has a girlfriend. I am miserable and desperate to split up, but I don’t see how we can afford it.
We bought our house in 2007. We could probably just about sell it for what we paid for it, but we would have to pay the realtor and the closing costs out of our own pocket. I’m willing to just move out and give him the house, if he can give me enough money out of his 401(k) to allow me to start over with a new place, but he says his 401(k) has declined so much that he can’t afford to give me more than a few thousand dollars.
I feel like I’m in prison – help!
Living with an estranged spouse can make your house feel a lot smaller.
Answer
Historically, economic decline and the pressures that go along with it leads to an increase in divorces. In the recession of the 1970’s divorce rates nationally increased by nearly 20%. The flip side of the coin is that divorce itself can be an expensive process: it costs money to divide up assets, to move, and to establish two households with the same income which used to support just one.
The housing market doldrums makes this especially challenging, especially in a place like Seattle where couples have traditionally invested heavily in their homes, thinking that this was a smart economic move. When real estate prices fall, many divorcing couples are stuck with a large mortgage debt as well as a principle asset of little (or even negative) value.
There is no easy fix for this problem. The key is to think creatively.
Dealing With a House That Has Little or No Equity
This is not a great time for either of you to be getting out of the real estate market, so what are the alternatives? Find out what your house would rent for. Especially if you do not have children, it may feasible for both of you to re-house yourselves as cheaply as you can (for example, moving back in with parents, sharing a house with friend, renting a studio in a less-expensive neighborhood) and let rental income cover most of your monthly mortgage payment.
You could then either each continue to pay towards the monthly mortgage shortfall, or even negotiate with your mortgage company to see if they will grant you a temporary reduction in your monthly payments because of your separation. The advantage to arrangements like this is that you buy yourselves time to let the value of the house increase prior to a sale and division of the proceeds.
If one of you has enough income to cover the mortgage alone, it is possible for the other spouse to move out now, with a secure guarantee of a buy out at a later date. Let’s assume that your husband can cover the monthly mortgage payments on his own, but he can’t re-fi right now and he can’t afford to buy out your interest in any other way. The two of you agree that a fair settlement on the house would be for him to pay you $10,000.00 in no more than 2 years.
How can you move out and feel confident that he really will pay you? You can transfer the house to his sole name with a quit claim deed, he can sign a promissory note setting out the money he will pay you and when, and you secure the promissory note with a deed of trust which you register just like a mortgage.
This is a theoretically simple procedure which only protects the interests of both parties if it is done absolutely correctly; it is essential to have these documents professionally drafted by an attorney. This is one area where, even in a recession, you cannot cut corners.
If you do have children, then there is all the more reason for one parent to try to stay in the house with the kids, at least for a few years. If the parent with whom the children will live primarily is the lower-earning spouse, then the higher earning spouse may be in the unenviable position of having to move out AND keep paying towards the mortgage.
One option in this case is for the higher earning spouse to take a fair share of assets from other sources like savings, retirement accounts and vehicles to achieve an equitable balance, with the lower-earning spouse getting the house. If there are not enough assets apart from the house to balance the ledger, then the higher earning spouse may have to accept getting a share of the house when it is sold at some distant date: after the kids finish high school, for example.
Dividing Up Retirement Assets Without Liquidating
Another point to keep in mind is the fact 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.
