After 17 years of divorcing people, I have learned that the average Illinois resident only has two assets: their 401(k) and their home.
Their home is worth as much as it would sell for on the open market less than the balance of the mortgage for that home. This amount of surplus in value over what is owed is referred to as the “equity” of the home.
The equity of the home is usually divided between divorcing couples via a buyout or a division of proceeds after the sale of the home.
When the outstanding mortgage owed is greater than the value of the home, the mortgage is referred to as being “upside down.” When a marital property’s mortgage is upside down, the parties do not divide any value in the home during an Illinois divorce…because there is no net value in a home with an upside down mortgage.
Instead, a house with an upside down mortgage has a negative value. That negative value must dealt with during the sale of the house or accounted for if one party keeps the house…and the greater debt.
Illinois divorce courts “shall divide the marital property without regard to marital misconduct in just proportions” 750 ILCS 503(d)
“”[M]arital property” means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage” 750 ILCS 503(a) (emphasis mine)
This is not a new problem. I have been practicing family law since 2006. From 2008 to 2014….all of the houses were worth less than the mortgage against them. It looks like we are going to have a similar situation in the next year or two. Luckily, I remember how we dealt with upside down mortgages three presidents ago.
If One Party Gets The House And Remains Responsible For The Mortgage
Just because a mortgage has a greater balance than the value of the house does not mean that the house is not worth keeping. The monthly payment of the mortgage may still be a manageable expense for one party. In that case, one party can keep the house and be responsible for the mortgage payments.
The mortgage will still remain in both parties names because no lender will allow a refinance of a mortgage that is greater than the value of the underlying property.
The party keeping the house promises to indemnify the other party for the debts associated with the assets they are keeping.
Indemnification is “the action of compensating for loss or damage sustained.” Black’s Law Dictionary (11th ed. 2019)
Every marital settlement agreement should include language similar to that below.
“Each party shall and does indemnify the other against any liability for the unpaid past, present, or future debts, taxes, or other liabilities, associated with the assets, liabilities, and income allocated to him or to her pursuant to this Article, except as otherwise provided in this Agreement.”
Should the party keeping the house fail to pay the mortgage (which is still under both parties names), the other party can file a contempt petition in divorce court against the party who should pay the mortgage.
In the meantime, the party that does not keep the house cannot have their credit tied up in a house that they are not even living in. The party keeping the house should agree to make continuous good faith attempts to refinance the mortgage and, thereby, remove the other party’s obligation.
I typically suggest an exchange of 3 good faith refinance attempts a year with a maximum of 3 years to refinance. Furthermore, I suggest the parties contract that a “failure to refinance per the agreement shall result in the immediate sale of the house by a real estate agent to be chosen by [party who didn’t keep the house]. All proceeds to be split equally. All liabilities after the sale shall be born by [party who kept the house].”
This language worked fine for the dozens of clients I had from 2008-2014 who used that language in their marital settlement agreements. Presumably, their mortgage balances got small enough and the values of their homes got large enough where they were able to refinance…because I never heard from any of those clients after.
Selling A House With An Upside Down Mortgage During An Illinois Divorce
If neither party elects to keep the house and the house’s debts. The house must be sold. What happens to the surplus debt after the sale in an Illinois divorce?
In theory, the divorcing couple should have to pay the extra money owed against the mortgage after the sale of the house…but that never happens.
Instead, the mortgage company will offer the mortgage holders a short sale of their property.
A short sale is where the mortgage lender agrees to forgive the balance between the sale of the property and the outstanding mortgage.
It is almost always in the mortgage lender’s best interest to cooperate with a short sale.
“In exchange for the bank’s forgiveness of the total debt, plaintiffs agreed to walk away with $0 at closing. The advantage to the bank was that it received a substantial amount of the mortgage balance quickly versus having to go through the costly foreclosure process.” Morse v. Donati, 136 NE 3d 1043 – Ill: Appellate Court, 2nd Dist. 2019
Even if neither party to a divorce wants the house or the trouble of selling the house, the parties can still approach the mortgage lender and get away with owing nothing via a deed in lieu of foreclosure.
A deed in lieu of foreclosure is “a deed by which the borrower conveys fee-simple title to a lender in satisfaction of a mortgage debt and as a substitute for foreclosure.” Black’s Law Dictionary (11th ed. 2019)
Again, it is almost always in the mortgage lender’s best interest to just forgive the mortgage and take the house.
“[A] mortgagee may, if he so chooses, accept a conveyance from the mortgagor in order to avoid the expense of proceeding with a foreclosure action.” First Illinois National Bank v. Hans, 493 NE 2d 1171 – Ill: Appellate Court, 2nd Dist. 1986
The important thing to realize about indemnifying your ex-spouse while taking over the mortgage or doing a short sale or deed in lieu of foreclosure is that it must be agreed. The court has no authority to force the parties to enter into any of these agreements with each other or the lender. If there is no agreement, the court will let you flounder into foreclosure or force the sale of the house even if a debt remains owed.
“In distributing property, courts should seek a high degree of finality so that parties can plan their future with certainty and are not encouraged to return repeatedly to the courts.” In re Marriage of Hellwig (1981), 100 Ill. App.3d 452, 459, 426 N.E.2d 1087, 1092.
Sitting in the house while not paying for the mortgage and letting the house go into foreclosure is the worst option. The bank will demand that the house be turned over and that both parties be responsible for the debt against the house. The bank can even intervene in the divorce to be sure they are paid from whatever other assets the parties have.
“Upon timely application anyone shall be permitted as of right to intervene in an action: (1) when a statute confers an unconditional right to intervene; or (2) when the representation of the applicant’s interest by existing parties is or may be inadequate and the applicant will or may be bound by an order or judgment in the action; or (3) when the applicant is so situated as to be adversely affected by a distribution or other disposition of property in the custody or subject to the control or disposition of the court or a court officer.” 735 ILCS 5/2-408(a)
Illinois divorce courts are pretty liberal about adding new parties to divorces. Including intervening parties is really the only way to resolve outstanding and unknown obligations of the divorcing parties.
“The court may join additional parties necessary and proper for the exercise of its authority under th[e Illinois Marriage and Dissolution of Marriage Act].” 750 ILCS 5/403(d)
If your mortgage is underwater and you are getting divorced in Illinois contact an experienced Illinois divorce attorney to guide you through the process of removing your spouse and possibly your upside down mortgage from your life.