Equitable Distribution of Negative Equity

 

The factors that must be considered by the court for purposes of determining equitable distribution of assets and debts acquired during marriage are identified in N.J.S.A. 2A:34-23.1.

Items included for purposes of equitable distribution are:

• marital properties
• vehicles
• bank accounts
• stock options
• retirement accounts
• mortgages
• credit card debts
• automobile loans
• any other assets and debts obtained or incurred by the parties during the marriage.

An interesting issue arises, however, when one party seeks to retain a marital asset that is underwater. Presented another way, how do courts determine equitable distribution of negative equity, whether a residence, automobile, or the like? In a recent unpublished opinion, the Appellate Division of the New Jersey Superior Court upheld the lower court’s equal allocation of negative equity between two parties.  The trial court determination that negative equity of a marital property is a joint marital liability subject to equitable distribution.

In affirming, in part, the trial court’s decision, the Appellate Division calculated each party’s share of equitable distribution by adding the “net value of all properties and businesses, and divid[ing] that amount in half…”. It then subtracted $100,000 from the wife’s share of the negative equity in a marital timeshare whose mortgage exceeded its value by more than $200,000. In justifying this calculation of negative equity, the Appellate Division relied on the fact the wife asserted no objection in calculating the equity of other marital property by “subtracting the amount of the outstanding mortgage from the value of the property,” and that the only difference in doing so with respect to the marital timeshare versus other marital property, is that the timeshare was encumbered by more debt than its appraised value. With this reasoning, the lower court’s decision on this issue was affirmed.

The Florida Case

Since the Appellate Division’s opinion is unpublished, it does not establish precedent in New Jersey.  However, it is worth noting that the District Court of Appeal in Florida reached a similar conclusion regarding the disposition of negative equity.   In so deciding, the Florida court opined that the trial court “erroneously assumed that the negative value associated with the [parties’] condominium would simply vanish if the parties were to ‘abandon the residence’ or ‘return the keys to the banks holding the indebtedness.” The Florida court additionally relied upon the fact that debtors remain liable for any debt that is not satisfied following foreclosure proceedings. As such, the lower court had to consider the condo’s negative equity as a joint marital liability for equitable distribution.

This Florida court’s principle would appear consistent with the New Jersey Appellate Division decision. This suggests that a determination as to negative equity in New Jersey is similarly subject to the state’s statutory factors.

Please contact me at jlawrence@lawlawfirm.com if you have questions about this post or any other family law matter.