Debts, Costs, and Downsizing

Synopsis: This article answers some basic questions regarding debt and costs that a divorcing couple is going to face when dividing property, determining support, and considering whether to downsize.

Money is definitely a stressor in life. When you have two people with different ideas as to how money should be managed the stress can be magnified. Into the already stressful situation the couple adds the emotional and financial expense of a separation and divorce. Even when there has been a substantial marital estate built up over the years, you will be dividing a whole pot into two smaller pots. What are considerations to be addressed in a divorce to help protect your financial future?

I Don’t Think I Can Afford an Attorney, Can I Do this Without One?
Many times when finances are tight, people think that they should forego the expenses of an attorney and do things themselves. While it is always possible to represent yourself, it is not recommended. Many possible rights and strategies can be overlooked and what originally seemed like a money saving idea may end up as a costly mistake. We at Bender LeFante Law Offices charge a small fee for an initial consultation. A brief meeting can let you know some important basic information and can help you decide whether it is better to go with a professional or to try to handle matters on your own. Be honest with the attorney; voice your concerns from the very first meeting. It may be possible to work within your limitations. If not, it may be possible for the attorney to give you information which can help you make a more reasoned decision. Consider, also, entering a separation agreement, or the use of a mediator or other alternatives to a court action. Often these alternatives can be less costly than a court action. In fact, most attorneys hope to settle matters by agreement.

What If My Assets Lose Value After Separation?
In a North Carolina divorce action, property is usually valued as of the date of separation. But those values can change if market forces change. Passive increases and decreases in value are considered by the court, so the market forces will come into consideration in valuing assets. These passive changes in value, as well as income and expenses during the period of separation are neither separate nor marital property, but are called distributional property. (NCGS 50-20.) However, if the increase or decrease in value is due to the actions of one party, such as a situation where one person is actually working in the business, that income and any increase or decrease caused by that person’s active participation (work) is the property of the person doing the action.

Is it Taxable?
The distribution of property between parties which is incidental to the divorce (IRS regulations say 7 years) is generally not a taxable event to either party. However, the sale or transfer of property to third parties remains a taxable event. For example, it is not a taxable event to transfer the 100 shares of IBM in Husband’s name to Wife, but it is a taxable event to sell the stock and realize capital gain in the sale.

My Spouse Took the Credit Card Debt, Am I off the Hook?
No, while the court can enforce its order by contempt or you can file a breach of contract action if your spouse fails to do what is required in a separation agreement, the bank is not a party to your action. As far as the bank is concerned, you are still a party to the debt and you and your spouse are jointly and severally liable. Up until the account is awarded to the other spouse, you have the right to request that no new charges be allowed on the account. However, often times, the bank will not let you close an account if there it has an outstanding balance. In order to be removed from the liability, the bank needs to remove you from the account. Generally, the bank will require your spouse to agree in writing to be 100% responsible for the debt on the account. Ask that such a provision be included in any agreement or court order.

My Spouse Received the Family Home, What If He Doesn’t Pay the Mortgage?
Just as with the credit cards, if your spouse does not pay the debt, the bank will continue to hold you liable and the non-payment will affect your credit rating. However, most states have some form of anti-deficiency statutes which came into effect during the Great Depression. A shorthand way of looking at this statute is that the bank has the right to foreclose on your house and sell the property, but if the amount received is not sufficient to cover the first mortgage, the bank cannot come after you personally for the balance.

What about the Equity Line?
An equity line or second mortgage is not treated the same as the first mortgage and in many cases the holder of the equity line can come after the mortgagees for any deficiency. While your spouse may have agreed to indemnify and hold you harmless from any liability, that is cold comfort if he or she defaults on all his obligations, including the one to you.

My Spouse Received the Vacation Home, What If He Doesn’t Pay the Mortgage?
A vacation home is not a primary residence. If your spouse defaults on the mortgage, the mortgage company can foreclose and most probably can seek a judgment for any deficiency. Some mortgage companies will accept a deed in lieu of foreclosure, which still has a negative effect on credit, but will prevent any deficiency.

What Should I Consider in Deciding Whether I Should Keep the Family Home?
Probably the hardest decision to make in a property distribution is about the marital home. Many people have an emotional attachment to the home which far surpasses any financial value the home may have. To some, a home is the heart of the family, a place where they can be safe and secure. However, emotional thinking does you a disservice in making financial decisions. A rule of thumb is that it costs approximately 10% of the value of your home to maintain it each year. Some of these expenses are amortized, such as a new roof or a major updating of appliances, but many are day to day expenses. Older homes can have a higher monthly expense. If you have not already done so, you should make a monthly budget to determine if you have the financial means to maintain the home. If not, the home should be sold as part of the marital property, that way both you and your spouse share in the costs of the sale. Another consideration is the size of the home and the people in your household. While a large home may have been wonderful when the children were growing up, if your children are grown or almost grown, you may want to consider downsizing. Similarly, that large garden may not be something that you can keep up without your spouse’s green thumb. Finally, consider what else is available for your distribution. If the house has a large amount of equity and is the only major asset received, then all of your wealth is tied up in an illiquid asset.

Should I agree to Pay for College for the Kids?
In an intact family, spouses make decisions based on the information available at the time. If a child is not college bound or has a problem with drugs or alcohol, or just does not have the energy or ambition to obtain a college degree, you and your spouse would make a decision not to spend those funds on college for that child. Unfortunately, if you place your obligation in a separation agreement or a court order, then your desire becomes your obligation and you have no ability to make the decisions you otherwise would. On the other hand, if your child is college bound and in high school, you may wish to bind yourself and your spouse to a financial commitment so your child can pursue his or her education without worries.

I Want My Spouse to Have Health Insurance, Should I agree to Pay for it Forever?
Unfortunately, health insurance is very expensive. The earning spouse is usually covered through a plan with his or her employment, which can often cover the children. However, a spouse can continue on the earning spouse’s plan only until an absolute divorce. At that time, the non-earning spouse could qualify for COBRA insurance for up to three years. This insurance requires you to pick up the employer’s costs for the plan. When the three year term is up, you have no guarantee that you can continue the insurance. Since no one gets healthier as they age, it is often the case that an aging spouse is priced out of the insurance market or the plan is rated and does not cover certain conditions. It can easily cost huge amounts to obtain insurance for a person who has a medical history of serious medical conditions. Luckily, the Affordable Care Act will allow your spouse to find insurance comparable to the plan of the employee spouse at a reasonable cost. The spouse will, also, be able to know the cost of insurance when signing up. In that way, the correct amount can be used in determining expenses. Also, you and your spouse will both be entitled to Medicare when you reach age 65. While you may desire to sign up for supplemental insurance and prescription drug coverage, the major part of the premium has already been paid during your working years. In addition, the Affordable Care Act allows your children to be covered under your insurances until they reach age 26 so long as they do not have insurance offered by an employer. This is true for your children in the workplace or in college.

I Received Half My Spouse’s Retirement Account, Should I Cash it In?
If you cash in a deferred compensation account before you are of retirement age, you will have to pay income taxes (that is what it means when they call it a Deferred Compensation Account, it is not tax free but the tax is deferred until you take out the money) and a significant penalty for early withdrawal. These funds should not be accessed before retirement age unless there is a true emergency. Buying your child a car, taking a trip with your friends, or making the payments on the beach house are probably not good reasons to access these funds. In most cases, it will not be possible to maintain the same lifestyle after divorce as you did before. But, if you use your retirement account to maintain your previous life style, then you will not have those funds, or the increase in value they would hopefully generate, when you reach retirement age. There are hardship rules for withdrawing funds from deferred compensation funds early. Check with your CPA or with the IRS before you take a withdrawl to see if you qualify for a hardship exemption.

My Income is a Fraction of What We Had Together, What Should I Do?
Downsizing is hard. It is especially hard when people have become accustomed to a certain lifestyle and take the style for granted. Children, especially, can make a parent feel guilty if they are unable to buy the same things as their friends. But the adults are often just as determined to keep everything the same. The best thing to do is to take a realistic look at your finances.

  1. First, determine your yearly income from all sources, include your salary, interest, dividends, rental income, alimony, child support, any business income, trust income, insurance proceeds, social security, disability income, etc. In short, everything from any source whatsoever that you expect to receive. Reduce this number by your anticipated taxes (for example by taking the net income, not the gross income, and reducing any alimony payment by the taxes you have to pay on it) and divide it by 12 to get a monthly available income.
  2. Second find a list or form that lists common monthly expenditures.
  3. Determine how much you have spent on these items in the past year or two by reviewing your bank statements and checks, credit card statements, calling utility companies, etc. Figure out how much you have been spending.
  4. Determine if you can continue with your present lifestyle by comparing your present available monthly income to your present expenditures.
  5. Adjust your budget to reflect your current financial situation.
    There are only two things you can do to help your financial position: increase your income or cut your expenditures. Only you can determine which way you will go. Most probably, however, you will have to decrease your expenditures, at least temporarily while you are rebuilding your income. If you continue at your present level of spending you are not just delaying the inevitable, you are actually hurting your ability to establish an acceptable standard of living by depleting resources which you could be saving. Be realistic. If you need to retrain, begin a plan now. If you thought you wanted your large house, consider a smaller home. If you have a weekly massage with your friends, go for coffee instead. The annual fishing trip to Canada with your old college friends will have to become an every other year affair. Buy less expensive cuts of meat, fewer new clothes. Remember that luxuries are just that, not necessities.