Virginia Equitable Distribution: The Negative Equity Scenario

How do Virginia courts address real estate having negative equity in divorce cases?  Well, sometimes they don’t address them at all.

In Fox v. Fox, Record No. 0643-12-1 (Va. Ct. App. 2012), the parties jointly owned two homes with significant negative equity.  The parties could not afford either home and they did not qualify for refinancing.  In addition, neither party was clamoring to have the houses sold any time soon given that they would each suffer a substantial shortfall on their mortgages.  As such, the trial court was left in the position where a spousal buyout was altogether impossible and a forced sale was hardly desirable for either party.  So was the trial court nevertheless required to divide these jointly owned homes per an equitable distribution under Va. Code § 20-107.3?

Va. Code § 20-107.3 provides the mechanism for courts to divide marital property/debt as follows:

Step 1: “The court, upon request of either party, (i) shall determine the legal title as between the parties, and the ownership and value of all property, real or personal, tangible or intangible, of the parties and shall consider which of such property is separate property, which is marital property, and which is part separate and part marital property in accordance with subdivision A 3 and (ii) shall determine the nature of all debts of the parties, or either of them, and shall consider which of such debts is separate debt and which is marital debt.”  Va. Code § 20-107.3(A) (emphasis added).

Step 2: “The court may, based upon the factors listed in subsection E, divide or transfer or order the division or transfer, or both, of jointly owned marital property, jointly owed marital debt, or any part thereof. The court shall also have the authority to apportion and order the payment of the debts of the parties, or either of them, that are incurred prior to the dissolution of the marriage, based upon the factors listed in subsection E.”  Va. Code § 20-107.3(C) (emphasis added).

You should be able to tell quickly that subsection (A) is littered with the mandatory “shall,” while subsection (C) merely includes the permissive “may.”  The Virginia Court of Appeals noticed it, too, and decided that the trial court was accordingly not required to divide or transfer the houses.  As such, it upheld the trial court’s decision to do nothing about the houses and instead leave the parties as joint tenant owners of the same upon their divorce.  Presumably, the parties could go back to court per a partition action should they not be able to figure out how to dispose of the houses on their own, which action would include deciding who gets credits for various mortgage payments and improvements.