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Bank Account Blues - Debt, Credit,
By: Carol Ann Wilson
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.
Itís 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. (Donít expect to get much for used furniture unless it has value as
an antique or collectorís piece.)
If you ! canít 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
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
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 spo! use gives nonpaying spouse the right to collect
not only all missed payments, but also damages, interest, and attorneyís 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 didnít 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.
Just because the divorce settlement is final doesnít 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 doesnít have a clue how it happened.
Divorce Expense Debt
Although it isnít 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
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 wifeís column, list the marital equity in the house if she
is thinking of continuing to live there. List the entire value of the husbandís
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:
only possibility for a 50-50 division of things by value? By number?
more interested in cash than in things?
take less than 50 percent if your share is all cash?
more interested in future security than in present assets?
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?
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