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Carol Ann's Newsletter
January 2016
Table of Contents
1. What Happens to the Marital Debt During a Divorce Part 2
2. 13 Property Nuggets
3. Marketing Idea
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 2
Dividing Marital Property and Debts
Many people try to divide each asset as they discuss it - your half of the house is $4,000, my half of the house is $4,000. Since you will rarely divide the house like this, this may not be the most useful way to go about it. It may be more practical to list each asset as a whole item under the name of the person who will keep it.
For example, in the wife's column, list the marital equity in the house if she is thinking of continuing to live there. List the entire value of the husband's retirement in his column, if that is your initial inclination. An advantage to this method is that it allows you to see the balance, or lack of it, of your initial plan as you develop it. If you want to know dollar values, you may need a third party, such as an appraiser, to help you determine them.
This is the time to have a real heart-to-heart discussion with your about-to-be-ex about the range of his or her sense of fairness. Ask:
- Is the only possibility for a 50-50 division of things by value? By number?
- Are you more interested in cash than in things?
- Will you take less than 50 percent if your share is all cash?
- Are you more interested in future security than in present assets?
- Are you willing to wait for a buyout of your share, such as house selling or retirement, and are you looking for more than 50 percent to compensate you for waiting?
- Are you interested in a "lopsided" agreement (more to one of us than the other) to compensate for the larger earnings made by you or your spouse?
- Do you want to be "made whole" - meaning ending up where you were at the beginning of the relationship?
- Do you need to be compensated "off the top" for some contribution you made to the acquisition of property?
- Is there a possibility that any assets or investments are hidden?
If you both can agree on a generic plan that meets each of your ideas of fairness, you will find you have an agreement that practically writes itself. The bonus is that you save on lawyer's fees.
As you allocate the debts, decide first whether they are marital, separate, or a mix. Then agree who will pay off the balance of each. Remember that the problem of unsecured debts may be handled more easily as if it were a monthly credit card payment than a division of your property.
Think about the long-term effect of the division of assets and debts you are considering. For example, suppose you get all assets that appreciate slowly or depreciate, and which take money to maintain (home, car, furniture). Then suppose your spouse takes all assets that increase in value or produce income (stock, retirement accounts, rental home). Guaranteed, in a few years after the divorce, what in the short term appeared to be "fair" or "equal" will look quite different. Your spouse's net worth will far exceed yours - and the gap will just continue to widen.
The word bankruptcy strikes fear in the hearts of many people - especially those going through divorce. You may be trying to decide whether it is better to ask for alimony or a property settlement note and are caught in indecision. Perhaps your spouse has threatened either to leave the country if alimony is required or to file bankruptcy if money is owed or a property settlement note is due. Let's look at some of the rules of bankruptcy as they apply in divorce situations.
Two types of bankruptcy are available:
Type One allows you to develop a payoff plan over a three-year period and Type Two allows you to liquidate all of your assets and use the proceeds to pay off debts, erasing debts that cannot be paid in full.
Type One bankruptcy may preserve the assets and allow the debtor to pay off all the secured debt, as well as a portion of the unsecured debt, and discharge the rest of the unsecured debt. The debtor needs to make payments under a plan that is approved by the bankruptcy court.
Type Two bankruptcy forgives all unsecured debts and requires the forfeiture of all assets over a certain minimum protected amounts. Creditors have the right to repossess their fair share of the assets. The net proceeds from the sale of assets are divided pro rata among the creditors.
Here are some things to remember:
- If a spouse files bankruptcy before, during, or after divorce, the creditors will seek out the other spouse for payment - no matter what was agreed to in the separation agreement.
- While you are still married, you can file for bankruptcy jointly. This will eliminate all separate debts of the husband, separate debts of the wife, and all jointly incurred marital debts.
Caution - promissory notes or property settlement notes, especially unsecured notes, are almost always wiped out in bankruptcy. Some secured notes, depending on the property that secures them, can also be discharged. Here's what happened to Cheryl: Sam and Cheryl divided all their assets. To achieve a 50-50 division, Sam still owed Cheryl $82,000. He signed a property settlement note to pay Cheryl the $82,000 over a ten-year period at 7 percent interest. After the divorce, Sam filed for bankruptcy and listed the property settlement note as one of his debts. Cheryl never received a penny of the money that was due her.
Note: Certain debts cannot be discharged in bankruptcy. These include child support, maintenance, some student loans, and recent taxes.
2. 13 Property Nuggets
1. All earned income acquired during the marriage, no matter whose name it's in , is considered to be marital property, unless there is a prenuptial agreement stating otherwise.
2. A property settlement note can be used to even up a property division and should be collateralized.
3. Be careful when dividing assets if one spouse gets all the cash while the other spouse gets illiquid assets (such as real estate) or all retirement funds, which, when taxes are deducted, are not worth as much.
4. The expert who appraises the family business should not work for that business.
5. If the house has a large capital gain, that should be taken into account when dividing assets.
6. Even though your desire to keep the house is emotional, get some advice on the financial ramifications of keeping it.
7. If your spouse declares bankruptcy, any alimony and child support awarded will not be affected.
8. Most household furniture is valued at garage-sale value.
9. Any cash-value life insurance purchased with marital assets is considered property to be divided.
10. A gift or inheritance received during the marriage and kept in your name only should be considered your separate property.
11. If you or your spouse supported the other while he or she earned a degree or built a career, if may have value as property.
12. Before alimony is awarded, all property is divided.
13. The 1997 tax law created a $250,000-per-person ($500,000 per couple) exclusion from capital gain when selling the home. It can be reused very two years.
3. Marketing Idea
Jim Rutkowski has designed a website especially for the Real Estate Divorce Specialist. It explains to the public the issues with selling a house in a divorce. Take a look at some sample sites that he has done. I think you will be impressed. Go to
www.jimrutkowski.com/divorce
For those of you who are NOT Real Estate Divorce Specialists, you may want to use his services to promote you and your business.
4. From the Desk of Carol Ann
True Story: While in the lawyer's office with the wife client, I was explaining my report.
Let's say for the sake of this story, they had two assets - a mutual fund worth $240,000 and an IRA worth $240,000. I said, "Ruth, I'm showing that you get the mutual fund and Larry gets the IRA. The reason I've done that is that the IRA is really worth almost a third less because of the taxes that will be owed on it when it is liquidated. Now, if they object to this, we may have to split it 50/50. But because you might have to liquidate funds to live on and he won't have to because of his high income, it makes sense that you get the asset that is most favorable to you from a tax point of view. Does this make sense?"
Ruth said yes, she totally understood what I was getting at.
But then the Lawyer said, "But I think we really should split each of those assets 50/50 so that Ruth has some retirement funds."
Go figure! (They really need us to educate them)
5. Humor
The following are from actual courtroom testimonies:
Q: Now, Doctor, isn't is true that when a person dies in his sleep, he doesn't know about it until the next morning?
Q: So, the date of conception (of the baby) was August 8th?
A: Yes
Q: And what were you doing at that time?
Q: The youngest son, the twenty-year old, how old is he?
Q: She had three children, right?
A: Yes
Q: How many were boys?
A: None.
Q: Were there any girls?
Q: Were you present when your picture was taken?
6. Thought for the Day
When you feel grateful, you become great, and eventually attract great things.
- Plato's Law
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