The marriage is over. Husband and Wife own a home, with a mortgage that has an outstanding balance. The Wife also has a 401(k) with a balance that’s roughly equal to the value of the home minus the debt. A solution may be to award the house to the Husband and the 401(k) to the Wife, but what do you do about the Wife’s liability to the mortgagee?
If the distribution is made by agreement, you may include in the agreement a requirement that the Husband attempt to refinance the mortgage or otherwise take action that would relieve the Wife from the liability of the mortgage. You can also include language in the agreement that requires the Husband to indemnify the Wife in case the mortgage is defaulted or foreclosed. If on the other hand the distribution is made by the court because the parties cannot agree, the court should not be allowed to overlook the mortgage liability when awarding the home to one of the spouses. The court can also require the party awarded the home to attempt in good faith to refinance the home and to indemnify the other party for the debt.
The solution is not perfect, because the mortgagee will still consider the Wife to be liable for the debt and thus she may be prevented from obtaining her own mortgage in the future, or she may have her credit history negatively affected by a future default by the Husband. Financial options are often scant when divorce occurs, especially following the recent recession that wiped out so much wealth. At one time, when most families had significant equity in their homes, it was common to sell the home and use the proceeds of the sale to eliminate all other debt and leave both parties with some cash to start a new life. Those days are gone. New times require new/creative options.