A recession is a bad time to get divorced – especially if your home has sunk in value along with the rest of the housing market.

Last year, the divorce rate in the U.S. fell 4% after rising 7% in 2007, according to a report released last week by the National Marriage Project. While the news might cheer family advocates, it suggests something else to project director W. Bradford Wilcox: That couples with depreciated home values might be waiting to split until the market rebounds.

For most people, the house is one of their two biggest assets along with their 401(k). Right now, home values are down substantially from 18 months ago. In fact, according to Moody’s Economy.com, 31.8% of owners with a first mortgage are underwater meaning their house is valued at less than what’s owed on the mortgage. That means couples who decide to get divorced – and not live separate-but-together under one roof, an approach many have resorted to – are splitting liabilities instead of assets.

“It used to be that couples fought over the house because of continuity and stability for the children,” says Fadi Baradihi, president of the Institute for Divorce Financial Analysts. “That’s not happening anymore. Now everybody wants to run from it.”

But when a property has lost significant value, running isn’t so easy.

When it comes to the dilemma of selling or keeping the family home, the issue is if either spouse can actually qualify and refinance the home as a single, one-income household. With negative equity so prevalent today, it’s virtually impossible to get refinancing, says Leslie Thompson, a certified financial planner and partner at Spectrum Management Group in Indianapolis.

If the couple isn’t selling the house, the spouse who is staying has to refinance the mortgage – that’s the only way the bank will let the other go, says Richard Iglar, an attorney with Skoloff & Wolfe, P.C., a Livingston, N.J., law firm that focuses on matrimonial and real estate law. Otherwise, the departing spouse is liable for the entire mortgage; and, if the spouse that’s in the house misses a mortgage payment, the other is liable to pay but has no claim to any equity in house. But when there’s negative equity, it’s pretty much impossible to refinance. “It doesn’t make sense for the bank to make the loan,” he says.

That doesn’t leave a divorcing couple with many good options. Here are a few to consider.

Posted in: Sell Your Home
Tags: divorce, home values, Housing Market, negative equity, recession