How will a “strategic default” on my mortgage affect my Virginia divorce?
A strategic default is an intentional default on a mortgage loan by borrowers who are able to make the mortgage payments. Recent surveys have shown that as many as 25% of all mortgage defaults are now strategic defaults. In some areas where housing prices skyrocketed, home values have now decreased substantially to the point where the mortgage payoff may be considerably more than the fair market value of the home. The greater Richmond metropolitan area of Chesterfield County, Hanover County, Henrico County, and the City of Richmond has not experienced the kind of run up in real estate values that some other areas of Virginia, most notably Northern Virginia and the Tidewater area, have experienced. In those areas where home values skyrocketed and fell, some married couples have decided that it is better financially to stop making the mortgage payments and surrender the property to the lender rather than continue to make mortgage payments on a home that is upside down.
For most married couples, their home, the marital residence, and their retirement plans are the primary assets in a divorce and in a bankruptcy. In a divorce case, the husband and wife must decide how to divide the marital share of real estate and the 401(K) plan or pension, or submit the decision to the Virginia Circuit Court judge by requesting equitable distribution. The couple must also address who will pay the mortgage, hazard insurance, real estate taxes and utilities, and who has the right to occupy the real property until its final disposition. If the husband and wife have children, often the parent with primarily physical custody will prefer to remain in the former marital residence if he or she can afford the payments with a combination of income, spousal support or alimony, and child support. If the husband or wife can afford the mortgage, the other party will typically request a sale or refinance of the property to eliminate his or her responsibility for the debt or liability. This may not be possible where the mortgage payoff is greater than the value of the home. Alternatively, a husband or wife may agree in a separation agreement or property settlement agreement to pay the mortgage in lieu of paying support until the property is sold or refinanced at some point in the future when values increase, and then begin paying support to the other spouse or former spouse.
When a borrower defaults on a mortgage loan in Virginia, the lender usually has a right to pursue the borrower for a deficiency – the amount still owed on the loan after the net proceeds of the foreclosure sale have been applied to the loan balance. Both husband and wife would each be liable to the lender for the full balance of this joint debt, although a separation agreement or a court order may allocate responsibility for payment of the debt between the husband and wife. In such an instance, either or both spouses may decide it is in their best interests to discharge the liability to the lender with a chapter 7 bankruptcy. If the parties are still married, the husband and wife have the option of filing a joint chapter 7 case, even though they live separate and apart, to get rid of the deficiency from the strategic default.
You should consult with your Virginia bankruptcy or divorce lawyer to discuss how to address the debts or liabilities resulting from your separation and divorce.