Most divorce cases involve a marital homestead (the home where both the husband and wife live and own). Given the recent several years which have seen the housing market plunge and the aftermath of the bubble, most Americans and Minnesotans lost equity in their homes. Simply put, equity is the difference between Fair Market Value of the home and the combined encumbrances (mortgages and/or Home Equity Line of Credit) with respect to the marital homestead. For example, if the home is valued at $300,000, and the total liability on the homestead is $250,000, the marital equity is $50,000. As such, this $50,000 would be taken into account when fashioning a property settlement in the divorce.
Because of the severe drop in home prices, sometimes, there is negative equity in the home. Using the same example as above, if the approximate home value is $200,000, but the combined encumbrances are $250,000, the homestead has a negative equity of $50,000. In cases such as this, it is challenging to negotiate what the correct number should be on a balance sheet with respect to a property settlement. The person who is going to be awarded the home will argue that the balance sheet should reflect -$50,000. The person who is not going to be awarded the home, would argue that the financial balance sheet should reflect the value as $0.
The answer, especially if it comes to negotiations is not easy. The answer, depends upon the specific facts and circumstances and what else is being negotiated. Of course, what is being negotiated is the Fair Market Value at the current time. Therefore, it is important that this issue be correctly argued and negotiated depending upon the specific situation of your case.
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