By: Bryce Hopson
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Money, Debt, and the Modern Divorce – Part One
Nothing gives a family law attorney that get up and go energy like diving into the liabilities section of a client’s inventory—money is sexy! Hm. Let’s put it this way: if each client came with a checking account brimming with sufficient funds to pay every liability, and a bundle left over for reasonable, necessary legal fees, that would be one thing. That would be beautiful. That would be, dare I say, simple. The reality, however, is decidedly different: financial difficulties and debilitating debt are often the abrasive elements that eroded the bonds of matrimonial bliss that led to separation in the first place. Or, at least, they’re on the list. Therefore, the money piece of divorce is never a walk in the park. For today’s divorce attorney (and client), it can feel like a task better suited for Sisyphus.
Why Is It Worse Now?
According to recent data collected from the Federal Reserve’s Survey of Consumer Finances, Americans’ debt eclipsed a new record high of $13 trillion last year. People between the ages of 35-54 reported an average of $133,800 in debt. Ouch. One prevailing notion is that younger people—those millennials the baby boomers like to blame for, well, you name it—are taking on debt at a faster rate and paying it down at a slower pace than previous generations.
The rising price of everything—homes, education, groceries—relative to the sluggish crawl of most salaries leaves more people vulnerable financially. At the same time, landing a job even for a college grad is simply harder now, while opening a credit card with a hefty limit has never been easier. According to wealth data released by the U.S. Census Bureau in its Survey of Income and Program Participation, in households between the ages of 35-54, equity in their own home accounts for a whopping 63.7% of their total net worth. A variety of variables come to play in the shifting landscape of debt acquisition, with only one thing certain: we have all had to become more comfortable carrying debt.
What Does It Mean?
The practical impact of debt, not only on the divorcing couple but on the attorney handling the financials in said divorce case, cannot be underestimated. Facing a clientele increasingly at home with debt and a decreasing percentage of liquidity in their estates makes it essential for the family law practitioner to be ever mindful and well-versed with the underlying rules to create an equitable division. Attorneys must continuously seek new and unique ways of working with all forms of liabilities. At the same time, attorneys must be upfront with clients about the realities of property division given the lack of liquidity in many situations, even if the client’s tendency might be to stick his or her head in the sand. Spouses entering into a divorce, listen carefully: you will do better in the end financially if you are real with yourself and your spouse about your debt. What is your separate property, and what is your community property? Based on the rules, if the division is to be fair, an attorney must actually know the truth to navigate the rules effectively.
Let’s take a look at the main two culprits in a modern divorce, credit cards and mortgages, and apply examples to illustrate why being open from the beginning helps your attorney help you.
The Usual Suspects
The good news: credit card debt is an unsecured liability, so the risk on non-payment or late-payment for a client is usually limited to a damaged credit score. The bad news: joint credit cards create hassles and headaches before, during, and even after divorce. Let’s look at how that can play out: even though Joe had the balance of the joint AMEX he held with Jane awarded as his separate debt in the divorce decree, AMEX can still come knocking on Jane’s door for payment even after the papers have been signed if Joe stops making his payments. Not only will the shaming automated calls and persistent “PAST DUE/DELINQUENT” letters pour in, but Jane will also enjoy a hit to her credit score as a result of Joe’s nonpayment. In this situation, ideally her attorney would have advised her to pay off those credit card balances that are tied in any way to her social security number from the get-go. But the modern divorce reality is, Jane probably doesn’t have that kind of cash available; thus, she must hope her attorney is well-versed enough to advise her of options B and even C.
Option B involves making sure the AMEX account on which Jane is liable is transferred to an account that is in Joe’s sole name before she thinks about signing a decree. (Don’t feel too sorry for Joe: many opportunities exist to take advantage of a balance transfer). If option B doesn’t work, plan C is Jane’s failsafe: it can be utilized when a non-liquid asset is being liquidated pursuant to the terms of the divorce decree. In other words, since 90% of Jane and Joe’s net worth is likely tied up in their house, the decree says the house will be listed for sale and sold (and includes the manner in which the sales proceeds will be distributed). Jane’s smart modern lawyer should ensure the AMEX debt is on Jane’s side of the ledger (which hopefully allows use of that liability as an offset to acquire as much of the remaining 10% of the estate that is not tied up in the residence), and include a specific provision indicating that the first portion of proceeds from the sale should go to paying off the total balance of the AMEX debt. The state of current finances for most couples calls for unique troubleshooting: the advice is be aware and find an attorney who knows his or her way around the tricky quagmire of debt.
The mortgage, master of all financial liabilities! Thanks to the 2006 financial crisis and the role mortgage-backed securities played in the disruption of financial markets across the globe, the word “mortgage” exudes an ominous aura. Depending on the size and nature of your estate, the mortgage can sometimes present a seemingly insurmountable challenge to accomplishing goals. However, strategies exist with the right lawyer’s expertise.
Assuming the home is equally owned by both parties, the basic options are stay or go. Before making that decision, though, it is vitally important to first have the house appraised. You must know the home’s cash value to make an accurate assessment of the home’s monthly or yearly cost, which involves not just the mortgage payment, but also insurance, upkeep, and taxes.
STAY: Particularly when a child is involved, typically one parent will stay in the home to provide some sense of security and continuity. In this situation, one party will be awarded the residence and will “buy out” the other party by calculating the total equity and shifting funds from another asset, say a brokerage account, to offset the lopsided value going to the spouse who keeps the house. Simple, right? Theoretically. But let’s recall our modern Jane and Joe of the AMEX debacle: what happens when the couple lacks the additional assets necessary to even the division?
This might result in GO: Though many couples do not want to sell their home, it is typically the path to a cleaner, quicker, and simpler resolution as it is infinitely easier to divide the marital estate when the main asset has been converted to cash. However, the truth remains that most couples, whether it makes financial sense or not, will go to great lengths to keep the marital home if at all possible. Home might not always be where the heart is exactly, but it is where the kids go to school, have friends, and live. So, let’s say Jane decides to keep the house and continue living there: it is important to Joe that his name be removed from the debt secured against the house that has been awarded solely to his ex-wife. In the case of lacking necessary cash for a pay-out, Jane can refinance the house in her name only (Tip: taking your name off the deed doesn’t remove your liability for the mortgage).
However, Jane might not qualify for a refinance right away, and it might take six months or longer for her to show established income before the lender is willing to remove Joe’s name from the debt. For Joe, he may be willing to let it ride for six months, but if he does not want his name lingering on the mortgage note any longer than that, his attorney would do well to include a provision in the decree that triggers the sale of the residence if Jane’s refinance has not closed within six months of the decree being signed. Opening this dialogue with the lender and exploring qualification for refinancing before signing a decree will allow Jane and her attorney to make an informed decision instead of just tossing the dice and praying you roll the hard six. Despite the challenge of dealing with a mortgage liability attached to property that is awarded solely to the other party, best practice says that facing those challenges during the divorce saves the client from more heartache down the road.
Look for Money, Debt, and the Modern Divorce – Part Two, coming your way soon, which addresses the weird and wild card and/or leftover liabilities.
About the Author
Bryce Hopson is an associate attorney at Hance Law Group. Bryce excels in breaking down complicated legal issues and examining them with his clients in a clear, comprehensible, and concise manner, in matters such as property division, child custody, and pre-marital agreements.