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Dividing Land in Divorce: Family Law Meets Real Estate Law

A Case Study

One problem that often arises in divorce is that of dividing land, such as a home or other property. A typical case involves a home owned by the spouses as community property, usually encumbered by a mortgage. Although many other options are available, two common ways of dealing with the home are:

  • Option 1: Sell the home immediately and divide the proceeds. This option is often the simplest, but can put pressure on the parties to accept a lower price for the home in order to get the sale closed quickly. In addition, the process of moving will create more stress and increase the sense of disruption -- especially for younger children. Worse, after paying a sales commission, closing costs, and moving / storage expenses there may not be enough equity left for either spouse to make a down payment on a new home.

  • Option 2: One spouse conveys the home to the other. Sometimes the judge orders the acquiring spouse to refinance the home in his or her sole name within a certain period after the divorce. The transfer costs are nominal, and the acquiring spouse retains a familiar environment, which may be beneficial in promoting a sense of stability if that spouse is also the primary conservator of young children.

Under Option 1, there is relatively little for the family lawyer to do. Although the parties may sometimes elect to sell the home themselves, more often they will choose to list the property with a broker. The lawyer may be called upon to draft or review a real estate sales contract, to review the title insurance commitment or to prepare the deed. However, provided the closing occurs before the final hearing, the house itself essentially becomes a non-issue in the divorce.

Option 2, on the other hand, requires more attention to properly protect the rights of the conveying spouse.

Making Sure the Lender is Paid: The Deed of Trust to Secure Assumption

Seldom is the home owned "free and clear." Instead, there is usually a purchase money debt secured by a lien against the home. Sometimes, there is a home equity loan as well. Because divorce marks a time of uncertainty and financial instability for both parties, the lender is rarely willing to release the conveying spouse from personal liability for payment of the mortgage.

Most clients mistakenly assume that when they convey their ownership interest in the home they are no longer liable for payment of the mortgage. In fact, the concepts of ownership and liability for the mortgage are completely separate, meaning that it is possible for you to be personally liable for payment of a debt on real estate in which you own no rights. (This twist in the law is particularly problematic for a veteran who may find his or her VA eligibility tied up in a home that belongs to a former spouse.) Even if your "ex" is ordered to pay or refinance the debt, unless your lawyer prepares the correct documents you may find yourself watching helplessly as the bank forecloses on the property, tarnishing your credit in the process. Worse, if the bank is unable to recover its full investment by foreclosing and selling the home, the bank might then file suit against you personally to collect the deficiency.

Let that sink in for a moment: your lender can sue you for a default on your home loan even if your former spouse took the home and the divorce judge ordered your ex to pay the mortgage!

So, what can you do to protect your credit if your ex defaults in payment of the mortgage after the divorce is finalized? The answer lies in a document called a Deed of Trust to Secure Assumption ("DTSA"). Put simply, a DTSA is a second mortgage (or third or fourth, depending on how many prior liens are already in place at the time of the divorce), which gives you the right to take the home back if your ex does not pay the mortgage. In this way, the DTSA "secures" the ex's obligation to "assume" the unpaid debt on the home.

Note that the lien created by your DTSA is inferior to your home mortgage, meaning that it will be wiped out if your bank or mortgage company forecloses. For this reason, it is important that you notify the lienholder of your security interest and your current address as soon as possible after the divorce, and that you request any notices of default be sent to you as well as your ex spouse. Your divorce attorney might also add language to your decree that requires your ex to provide copies to you as payments are made. Because the mortgage company can usually complete a foreclosure in less than two months (or half that time in the case of non-homestead property), it is imperative that you keep up with the status of the loan.

The DTSA is not a perfect solution. The process of asserting your rights under the DTSA can be quite burdensome because you will be required to make up the past-due payments to the lender, go through a foreclosure process, and then try to sell the property to another buyer to recover your money. While you may ultimately decide not to exercise your rights under the DTSA, it is best to preserve your options by having the DTSA executed as part of the divorce.

Enlisting the Aid of a Real Estate Attorney

The family law practitioner must be familiar with a broad range of legal fields, including employment law, criminal law, business and contract law, estate planning, and real estate. Because each of these fields has become so specialized, it is not realistic to expect any one lawyer to be an expert in each of them. While most family attorneys feel comfortable preparing a basic DTSA, the real estate implications can become quite complex -- particularly if the property involves the rights of third parties, an easement, outstanding oil or mineral interests, unresolved liens, and the like. Moreover, it is not uncommon for the original home loan to have been refinanced one or more times, or bought and sold by several lenders. Without a strong real estate background, many family attorneys do not have the resources or experience to properly draft the DTSA and describe the obligations assumed. In such cases, it is often beneficial for a family attorney to confer with real estate lawyer, or even to delegate the task of drafting the necessary documents.

At the law firm of Roberts & Roberts, our years of experience in the fields of real estate and family law, together with our connections in the title industry, give us unique advantages that we pass along to our clients. If we can be of assistance in working with you on the real estate aspects of your family case, or if you need help enforcing the documents prepared by your family attorney, we would be pleased to consult with you.

Roberts & Roberts, LLP