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Carol Ann's Newsletter
December 2015
Table of Contents
1. What Happens to the Marital Debt During a Divorce - Part 1
2. 13 Emotional Facts of Divorce
3. CE Credits
4. From the desk of Carol Ann
5. Humor
6. Thought for the Day
1. What Happens to the Marital Debt During a Divorce - Part 1
We have referred to property as either marital or separate. The same classifications apply to debt. In general, both you and your spouse are responsible for any debts incurred during the marriage - it does not matter who really spent the money. When the property is divided up during the divorce, the person who gets the asset usually also gets the responsibility for any loans against it.
It's in both of your best interests to pay off as many debts as possible before or at the time of the final decree. To do so, use whatever liquid assets you have - bank accounts, money market funds, stocks, bonds, or cash values from life insurance. It may make sense to sell assets to accumulate some extra cash. The most easily sold assets include extra cars, vacation homes, and excess furniture. (Don't expect to get much for used furniture unless it has value as an antique or collector's piece.)
If you can't pay off the debts, then the decree must state who will pay which debt and within what period of time. There are generally four types of debt to consider: secured debt, unsecured debt, tax debt, and divorce expense debt.
Secured debt includes the mortgage on the house or other real estate, and loans on cars, trucks, and other vehicles. It should be made very clear in the separation agreement who will pay which debt. If one spouse fails to make a payment on a debt that is secured by an asset, the creditor can pursue the other spouse.
Unsecured Debt
Unsecured debt includes credit cards, personal bank loans, lines of credit, and loans from parents and friends. These debts may be divided equitably. The court also considers who is better able to pay the debt.
For unsecured debt, any separation agreement needs to include a hold-harmless clause. This will indemnify the nonpaying spouse, which means that the paying spouse gives nonpaying spouse the right to collect not only all missed payments, but also damages, interest, and attorney's fees if payments are not made. Without a hold-harmless clause, the nonpaying spouse has the right to collect only the missed payments.
Often, the legal decision and the financial outcome are very different things. This is a lesson Paul learned the hard way. Tracy and Paul were married eight years, during which time Tracy ran her credit cards to the limit with her compulsive spending. The court held Tracy solely responsible for paying the $12,000 in credit card debt. After the divorce, however, Tracy didn't change her ways and was unable to pay off her debt. The credit card companies came after Paul, who ended up paying them off.
In a case like this, one solution would have been to pay off the credit cards with assets at the time of divorce or for Paul to have received more property to offset this possibility.
Tax Debt
Just because the divorce settlement is final doesn't mean you are exempt from possible future tax debt. For three years after the divorce, the IRS can perform a random audit of your last joint tax return. In addition, the IRS can question a joint return - if it has good cause to do so - for seven years. It can also audit a return whenever it believes fraud is involved.
To avoid surprises, the divorce agreement should spell out what happens if any additional interest, penalties, or taxes are found, as well as where the money comes from to pay for defending an audit. We know of countless horror stories where the unsuspecting spouse (usually the ex-wife) is all of a sudden obligated for a huge tax bill and doesn't have a clue how it happened.
Divorce Expense Debt
Although it isn't always clear who is liable for debts incurred during the separation, typically these debts are the responsibility of the person who incurred them. An exception would be if one spouse runs up debts he or she is unable to pay to buy food, clothing, shelter, or medical care for the kids. The other spouse is probably obliged to pay those expenses.
You will accrue other costs during the divorce process, including court filing fees, appraisals, mediation, and attorneys. Other less obvious expenses are accounting, financial planning, and counseling. The separation agreement needs language that states who is responsible for these expenses.
Divorce expenses may accrue after the decree, such as attorney fees for doing QDROs, title transfers, and tax preparation for the final joint tax return, mediation fees, and long-term divorce counseling for the parents or the kids. Who pays? You do, unless it is spelled out clearly so there are no disputes at a later date.
2.
13
Emotional Facts of Divorce
1. The wife may not be able to keep the house.
2. The husband may need to share his pension.
3. In divvying up household items, you may not be able to keep your favorite painting or casserole dish.
4. After a difficult divorce, you may find it difficult to ever trust the opposite sex again!
5. You may never be able to trust your ex-spouse, who used to be your best friend.
6. The custody arrangements may be the pits.
7. You may not have as much money as you want, need, or used to have.
8. You may have to set up a visitation schedule for your family pet.
9. The kids will go to your ex for permission when you say "no."
10. Your old friends may not be your friends anymore.
11. You may not get invited to couples parties anymore.
12. You may dread running into your ex with your "replacement."
13. It's a lonely time - but possibly a time of positive transformation, if you play your cards right.
Did you know that the Colorado Department of Continuing Education gives 8 hours of CE credits for completing the certification course to become a Certified Real Estate Divorce Specialist?
4. From the Desk of Carol Ann
What do you do when the attorney for your client doesn't know how to handle the financial issues? I had finished a case where my client, the wife, was married to the CEO of a large corporation and earns over $1 million per year. When he retires in a few years, he will receive a company severance package of several million dollars per year which he will then divide with the ex-wife, my client.
I was disturbed by some of the details of this information and finally called the company's plan administrator. I found out that if the employee (husband) died before he retires, there would be nothing. I repeat, nothing. No severance package. Nothing for the ex-wife. Yet, the two attorneys who were trying to settle this case amicably had never considered this possibility and were not considering insurance. My information for them threw a glitch into the settlement, which they were almost ready to sign. My client is forever grateful to me , but I don't think the husband is!
5. Humor
The following are from actual courtroom testimonies.
Q: So the date of conception (of the baby was August 8th?
A: Yes.
Q: And what were you doing at that time?
Q: She had three children, right?
A: Yes.
Q: How many were boys?
A: None.
Q Were there any girls?
Q: How was your first marriage terminated?
A: By death.
Q: And by whose death was it terminated?
Q: Can you describe the individual?
A: He was about medium height and had a beard.
Q: Was this a male, or a female?
6. Thought for the Day
Do not forget small kindnesses and do not remember small faults.
-Chinese Proverb
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