Dividing property in a divorce is never easy, and when the marital home is worth less than the mortgage owed on it, things get even more complicated. Known as being “underwater” or having “negative equity,” this situation can significantly affect how assets and debts are divided. Fortunately, Indiana law offers several pathways for divorcing couples to address this common challenge while protecting their financial futures.
What Happens to an Underwater House in Divorce?
In Indiana, divorce courts operate under the principle of “equitable distribution,” meaning marital property and debts are divided in a manner considered fair, though not necessarily equal. A home with negative equity is treated as a marital asset, but also a liability. This means both parties may be responsible for the debt, even if only one person's name is on the mortgage.
An underwater home can complicate settlement negotiations, particularly when emotions are high or when one party wishes to remain in the home. Below are five ways divorcing couples can address this issue under Indiana law.
1. Sell the Home and Split the Loss
The most straightforward option is to sell the house and divide the resulting debt. If the mortgage balance exceeds the sale price, both parties will need to agree on how to cover the remaining loan. This could mean splitting the deficiency or allocating it to one party as part of an overall property settlement.
Pros:
- Clean break from the property
- May help both parties move on financially and emotionally
Cons:
- Requires lender cooperation for a short sale if funds are insufficient
- May impact both parties' credit
This route is best for couples who want a complete financial separation and are willing to take a hit on their credit in exchange for clarity.
2. One Spouse Keeps the Home and Assumes the Debt
Another option is for one spouse to retain the home and refinance the mortgage in their own name. This typically requires that spouse to demonstrate they can afford the mortgage and qualify for refinancing on their own.
The other spouse may receive other assets in the property settlement to balance the value of the home and its associated debt.
Pros:
- Allows one party to stay in the home, which can be beneficial for children
- Eliminates joint liability if refinancing is successful
Cons:
- Refinancing may not be possible due to credit or income limitations
Judges often prefer this arrangement when children are involved and when one party has a strong emotional or logistical reason to stay in the home.
3. Agree to Co-Own the Home Temporarily
In some cases, divorcing spouses agree to retain joint ownership for a period of time—typically until the market improves or until children graduate from school. During this co-ownership period, the parties share mortgage payments and maintenance responsibilities as outlined in the divorce decree.
Pros:
- Avoids selling in a down market
- Provides housing stability for children
Cons:
- Requires ongoing cooperation between former spouses
- Potential for conflict over upkeep and finances
Courts may approve this arrangement when both parties demonstrate the ability to work together amicably and responsibly.
4. Short Sale or Deed in Lieu of Foreclosure
If neither party can afford the home or qualify for refinancing, a short sale or deed in lieu of foreclosure may be the only viable option. In a short sale, the lender agrees to accept less than the full amount owed. A deed in lieu involves transferring ownership directly to the lender to avoid foreclosure.
Pros:
- Less damaging to credit than foreclosure
- May relieve both parties from further financial obligation
Cons:
- Requires lender approval
- May still result in a deficiency judgment or tax liability
Legal counsel is essential in these cases to negotiate with lenders and protect clients from unexpected consequences.
5. Offset the Negative Equity with Other Assets
Another strategy involves offsetting the underwater mortgage by awarding the other spouse more in assets like retirement accounts, vehicles, or personal property. This method can balance the overall settlement without requiring an immediate sale or refinancing.
Pros:
- Flexible and customizable to the couple’s financial picture
- May avoid immediate disruption to housing
Cons:
- Can result in a lopsided asset division if not carefully managed
- Risk of future default if the spouse keeping the home falls behind on payments
This solution requires careful valuation of all marital assets and liabilities to ensure fairness and avoid future disputes.
Creative Solutions for Marital Debt
Indiana courts are open to creative settlement agreements, particularly when both parties are represented and the arrangement is clearly documented. When negative equity is involved, the key is transparency and specificity: outlining who will pay what, when payments are due, and how the parties will handle defaults or unexpected expenses.
Consider including:
- A timeline for sale or refinancing
- Responsibility for taxes, insurance, and maintenance
- Contingencies for market shifts or nonpayment
Attorneys can help draft enforceable agreements that provide clarity and prevent future litigation.
Protecting Your Credit After Divorce
No matter which path is chosen, protecting your credit should be a top priority. Because a divorce decree does not override a mortgage contract, lenders can still hold both parties accountable if joint debt is not paid.
Steps to protect your credit include:
- Closing or refinancing joint accounts
- Monitoring credit reports for missed payments
- Establishing clear communication about shared responsibilities
Failing to manage joint debt post-divorce can have long-term financial consequences. Consult with both your attorney and a financial advisor to develop a plan that protects your future.
Final Thoughts
Dealing with an underwater house during divorce is complex but not impossible. Through sale, refinance, joint ownership, or asset offsets, Indiana couples have several options to resolve the issue fairly. At Ciyou & Associates, P.C., we understand the nuances of Indiana divorce law and can help you craft a strategy that protects your legal and financial interests.
If you’re navigating a divorce and facing property division challenges, contact us for a confidential consultation. We’ll help you move forward with confidence.
Frequently Asked Questions
Q: Is negative equity considered marital debt in Indiana?
A: Yes. Indiana courts treat a mortgage with negative equity as marital debt to be divided equitably between the spouses.
Q: Can I remove my name from the mortgage after divorce?
A: Only through refinancing or lender-approved loan modification. Being removed from the deed does not remove your financial obligation.
Q: What happens if we stop paying the mortgage?
A: The lender may begin foreclosure proceedings, which can severely damage both parties' credit. It's essential to have a plan in place.
Q: Will the court force us to sell the home?
A: Not necessarily. Courts often allow flexibility if the parties agree on a reasonable plan. However, the court may order a sale if no workable solution is presented.
Q: What if neither of us can afford the home?
A: Options include a short sale, deed in lieu of foreclosure, or a plan to split the loss as part of the divorce settlement.
Need help handling complex property issues during divorce? Contact Ciyou & Associates, P.C. today to speak with a divorce attorney who understands the financial challenges and legal strategies involved in Indiana divorces with underwater houses.
Dealing with negative equity requires careful negotiation and may impact your credit. Legal advice can help you avoid costly mistakes.
This blog was written by attorneys at Ciyou & Associates, P.C., and this blog is not intended to provide specific legal advice or solicitation of services as this is an advertisement.
