Mortgage Traps for the Unwary

Blissful, young newlyweds on a let’s-build-a-nest high, you and your spouse purchased a half million dollar house with zero down on a thirty year mortgage with a balloon payment. Ten years later, the bliss has soured and you both want out, but the house is worth $300,000 and you’ve barely made a dent in the principal. So, your house is “underwater.” Now what?

If you are facing foreclosure. If you cannot repay your mortgage loan, your lender (or, more likely, the lender’s assignee) may begin the foreclosure process pursuant to the terms of your mortgage and federal and state law. If you face a foreclosure, contact your lender and request a meeting immediately. At the meeting, discuss what options you have to delay the foreclosure. These may include forbearance, refinancing, a longer redemption period in the event of foreclosure, a new payment schedule, and a short sale. Be proactive. Do not wait for a foreclosure notice to contact your lender or hope that your divorce will shift the debt to your spouse. Usually, it will not. Explain your legal and financial problems to your lender, and ask for reprieve. Bring financial documents, such as bank account statements and paystubs, to substantiate your financial predicament. The lender may or may not be able to sue you to collect any deficiency between the bid at the foreclosure sale and the outstanding balance on your loan. The terms of the loan will specify whether the loan is a recourse loan, rendering you liable for the deficiency, the notice, if any, required before beginning the foreclosure process, and any other rights you have independent of federal and state law to stop the foreclosure. Request a copy of your entire mortgage and note file. Read it thoroughly and make sure your lender is following every duty to a T (Was notice proper? Do you have an opportunity to cure the default? Is the note a recourse note?) Most lenders are willing to work with you if you are sincere and in good faith negotiate a repayment plan because lenders would rather have an income stream than an empty house.  

If you can negotiate a short sale. In a short sale, the lender agrees to accept less than the borrower’s mortgage indebtedness when the borrower sells the property to a third party in an arm’s-length transaction. Lenders usually agree to short sales to avoid the costs of foreclosure and having a large inventory of empty, unsellable homes. However, short sales come with their own costs. First, as a matter of contract law, a lender may pursue a deficiency if the short sale approval is not conditioned on the lender waiving the deficiency. Therefore, be sure to condition any short sale plan submitted to your lender for approval on the lender waiving any deficiency. Second, the short sale approval process is long and tedious; you and your potential buyer must be willing to wait. Large lenders have short sale packets for use. They include forms for, inter alia, comparative market analyses and brokers’ price opinions, hardship letters, financial disclosures, authorizations to release information, listing agreements, and proposed sale terms. If your lender does not, you will have to obtain these materials. A real estate agent and/or a lawyer experienced in real estate law should be able to assist you. Third, if the lender does approve the short sale and waive any deficiency, the forgiven debt may trigger income tax liability. The lender must send the borrower Form 1099-C, Cancellation of Debt, to indicate the amount of debt forgiven.[1]

If you deed the house to one spouse. If your court awards you or your spouse your home, the award does not, absent more, affect each spouse’s liability on the home mortgage. Because the lender is not a party to your divorce, the court cannot adjudicate the lender’s rights to repayment. Careful drafting in the divorce decree and all deed documents is an absolute must to avoid unintended liability. For example, in Marrow v Marrow,118 NC App 332; 454 SE2d 853 (1995), the North Carolina Court of Appeals held that a deed to a spouse “assuming the mortgage,” absent more, did not mean the spouse agreed to relieve the other spouse from liability on their home mortgage because (1) the spouse took no further action (e.g., by making full payments) and (2) the parties’ decree awarded the house to the spouse but required each of them to pay the mortgage until the house sold. To protect the non-taking spouse, the decree should require the taking spouse to refinance the mortgage into the spouse’s name immediately; if that is impracticable, the decree should impose on the spouse a continuing duty to apply for refinancing in good faith until successful and, in the interim, to hold the non-taking spouse harmless for any mortgage default and the costs thereto (e.g., interest or penalties). The decree should specify each spouse’s responsibility for property taxes, insurance, homeowners’ association fees and any other liabilities until the home is refinanced or sold. The decree should specify what recourse the non-taking spouse has against the spouse in the event of default, such as liquidated damages, a default judgment equal to the amount of the mortgage or other liabilities the non-taking spouse has to pay, mandatory attorney fees and/or contempt.

[1] Tax liability for short sales is in addition to the tax consequences in IRC 1041 (for sales and other dispositions incident to divorce) and IRC 71 (for includability/deductibility of certain periodic payments in a divorce decree or other written separation agreement). These tax issues go beyond the scope of this article. You should contact a tax attorney and/or your financial advisor for a thorough assessment of the tax laws applicable to you. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, be advised that any federal tax advice contained in this article was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Always consult a specialist for thorough tax advice.

MORTGAGE WARS AND OTHER FIGHTS THAT HURT YOUR CREDIT: HOW TO PROTECT YOUR CREDIT SCORE

As the first of the month approached, the war between Bill and Sue escalated. Their divorce was not amicable by any means, but, usually, their animosity was a dull roar over who would take the pictures, the furniture and the motor boat– until the mortgage came due.  They lived in the same house, Bill in the basement with the dog and Sue everywhere else. Bill could not venture upstairs to Sue’s space, and she could not trudge downstairs to his. But when the mortgage came due, neither wanted to pay for any of it – not their own space, and certainly not the other’s.

So, they stalled. The first day of the month would pass with no payment. Then the second and the third. By the fourth day of the month, Bill would send an e-mail “reminding” Sue to make the payment, and Sue would leave a note on the basement door “reminding” him to do the same, with a sarcastic “DEAR” underlined angrily in black pen. By the sixth day of the month, they unleashed their lawyers. First there were phone calls accusing each other’s client of ill will. Then there were e-mails, letters and faxes. Then the seventh, eighth and ninth days of the month would pass. Still no payment.

On the tenth day of the month, one spouse always caved in: Bill. He would make the payment at lunch, then, after work, mutter past Sue in the kitchen on his way to the basement grumbling an explicative or two and anticipating the day he would no longer be tied to her.  If he ever wanted to move out of that basement, he had to protect his credit.

Joint debt is a large source of contention in divorce, second only, in my experience, to children.   What seemed like a good idea during the marriage --  that mortgage to buy a bigger home or credit card with a secondary cardholder so both of you could buy groceries and pay bills, for example – feels like the biggest mistake ever during divorce. Inevitably, one spouse insists the other pay, or cannot pay, or simply hoards money elsewhere and refuses to pay. If neither pays, well, you know what happens next: a derog on the credit score.

Join that with a hefty legal bill, a mortgage to refinance, car loans and student loans and personal loans to pay, and your credit score will crash and burn, taking your pocketbook and your sanity along with it and making you crazier than you were during your marriage and divorce.

How can you protect your credit score?

Before Your Divorce

Before your divorce begins, gather your records, find out who owes what, and set guidelines for who pays which debts, when and how. This is your first step and the most important you will take, financially, during our divorce. You must have a frank, open discussion with your spouse about your finances – it is easy for the spouse left in the dark to think the other is hiding money, which leads to the inevitable wild accusations, threats from attorneys, subpoenas for bank records, and thousands spent just to prove you really were, in fact, in debt and had no bank account worth millions in Sweden. (If you think this is incredible you either (1) are not divorcing or (2) are one of the luck few who have not faced these accusations.)

If you maintain a filing cabinet or an e-file for your bills, then start there. Make a copy of each bill (they have a way of “getting lost” or snatched for your spouse’s attorney). Create a spreadsheet that details each creditor, outstanding balance, minimum payment and how to make it, due date, and reason for the debt. Decide which debts you can pay off before you divorce (e.g., a clothing store charge card) and which you can do without (e.g., a monthly gym membership) during your divorce. If you and your spouse are one of the few amicable divorcing couples, use the spreadsheet to negotiate who will assume which debts.

If you are like most people, however, your records are not so immaculate and well-kept. You should order a credit report to determine which debts are in your name, and your spouse should order one, too, for comparison. You may obtain a free credit report each year online at www.annualcreditreport.com. You must supply identifying information, like your Social Security Number, and it will be tempting to order your spouse’s at the same time. Do not. It is a federal crime to order someone else’s credit report without the person’s authorization, even your spouse’s, and you face fines and jail time if you do.  See the Fair Credit Reporting Act, 15 U.S.C. 1681n and 15 USC 1681n.  

When you have all of the debts and who pays what listed, consider making your payment plans enforceable. Do not expect your spouse to pay one-half the mortgage or her own car loan willingly.      You are getting a divorce for a reason, after all. Consider memorializing your payment plan in a writing signed by both spouses and their attorneys and submitted to the judge for entry as a temporary order.      An order is a mandatory directive for each spouse to pay particular debts, and it carries with it the threat of contempt. If your spouse refuses to pay her share of the debt, for example, you may ask the judge to hold her in contempt, with all of the fines and punishment and attorney fees contempt entails, to compel her to make the payment and/or to reimburse you if the creditor badgers the payment from you.

However, the same is true for you. Therefore, if your finances are precarious and you will not have the funds to pay your share, you should forgo a temporary order in exchange for (1) a serious consultation with a bankruptcy attorney and/or (2) a prompter property settlement.

When You Divorce

When you divorce, negotiate your property settlement (if you settle your case) or request an order (if you try your case) that reduces the number of joint debts and has serious consequences when one ex fails to pay the joint debts that remain.

If you and your spouse cannot pay off joint debt, transfer as much as possible to the name of the spouse assuming the debt. For joint credit cards, make use of those credit card offers with the zero balance transfers and low introductory interest rates – the junk mail you normally toss out with yesterday’s news – to transfer the debt to individual credit cards. For credit cards with joint debt in just one spouse’s name, award the entire balance to that spouse and credit the spouse, if needed, with an offset of marital property (maybe you keep your entire retirement account, for example, and assume liability for the MasterCard you used to remodel your kitchen). For debt secured by property (e.g., a car loan), award the debt to the spouse taking the property. For other joint debts, require the spouse to seek refinancing ASAP; this might be a conversation you have together with a financial advisor.

If you cannot transfer joint debt to one spouse’s name, be sure your divorce decree specifies,  in  meticulous detail, each spouse’s responsibility toward the debt. The spouse taking the debt should have a continuing obligation to pay the debt and/or seek refinancing diligently and in good faith. The spouse should also have the duty to hold the other spouse harmless (meaning she will reimburse him) for any nonpayment or other liability that spouse incurs for the debt. The relieved spouse should have a right to inspect all records for payments and refinancing. Include incentives for the taking spouse to pay the debt on time. These could include actual attorney fees and costs if the other spouse has to enforce the decree for nonpayment, liens against property awarded to the taking spouse until repayment, an automatic wage assignment in the event of nonpayment and/or a requirement to maintain life insurance sufficient to pay for the debt until repayment.  

After Your Divorce

After your divorce, do not assume you are totally free from the debt your spouse assumed.

A divorce decree that requires one spouse to “assume and hold the other harmless from” a debt does not mean the relieved spouse is never responsible for paying the debt. This is because a court cannot limit the rights of third parties who are not also parties to the divorce. For example, the decree may require your ex to timely make all payments for the boat she or he wrangled from you during settlement negotiations, but if she or he skips a payment the boat company can pursue you. The burden is yours to answer for that debt, because you signed for it. Then, your option is to spend time and money pursuing your ex for reimbursement.

Another option is the credit flag. An ex-spouse whose credit score suffers when the other fails to pay an assumed debt may insert an explanation in his credit report. The explanation should state, at a minimum, that the other is responsible for paying the debt as a result of divorce. See the Fair Credit Reporting Act, 15 USC 1681j. A flag will explain the derog and may mitigate adverse reactions from potential creditors, but it is not a perfect solution. The debt remains unpaid, and you pepper your report with ties to your ex. You must still pursue your ex for your money.

Query: If she cannot pay the boat company, how can she pay you? See, now, why it is important to have that frank discussion over finances first? Otherwise, you may find yourself paying that debt to keep your credit intact, and muttering about like Bill.

CROPS, LAWSUITS, BONUSES AND OTHER ODD PERSONAL PROPERTY

Most of the personal property you accumulated during your marriage is easy to divide when you divorce—well, not easy in the sense that it is pleasant to do, but easy in the sense that, in the eyes of the divorce court, there are well-established rules for valuing and dividing it. You may not find it pleasant at all, for example, that your ex-to-be is entitled to one-half of your retirement for the amount you acquired between your marriage and your divorce, even though only you worked, but this is the rule in almost all states.

But, there is some personal property that is either too difficult to value, without risky assumptions, or too difficult to divide, or both. Here is how to deal with the more common of them--

Crops & Mineral Rights– Crops are usually a property right separate from the land on which they grow.  So too are minerals below the land. If you have already divided these during your marriage, you should receive payment periodically for them (e.g. for annual harvesting), and you should decide whether to include the payment as income to the recipient, for support purposes, or as property to be divided between the two of you. If you have not divided them during your marriage, then be sure to do so during your divorce – particularly if your ex-to-be is retaining property that is potentially rich with crops and/or minerals. You may do this by selling the rights during your divorce and splitting the profits; dividing the profits in the event of a future sale; alternating years in which you each receive payment or property (e.g., odd years, you harvest); or asking for your appraiser to appraise the property with the crops and/or mineral rights included, though this carries with it assumptions about the market that you may not wish to take.

Pending Bonus – Bonuses for work performed during the marriage are almost always marital property, but what should you do if payment is delayed until after divorce? Similarly, how will you know if your then-ex receives a bonus? If you are settling your case, require that you each disclose any bonus received (and, if not, forfeit it entirely) for the year in which you were divorced. This may be by requiring disclosure of the paystub, a letter from HR, a tax return or any number of these. Then, decide upon a percentage to award the other spouse, such as one-half for the prorated amount allocable to the months of your marriage (e.g., if you were married one-half of the year, then one-half of one-half of the bonus goes to each of you).  If your case goes to trial, ask the judge to order these things.

Pending Personal Injury Lawsuit  - Similarly, a personal injury lawsuit that settles or results in judgment after your divorce, for an injury that either of you sustained during the marriage, is also potentially marital property. The injured spouse is going to assume the award is his or hers; after all, that spouse sustained the injury. However, most personal injury lawsuits will include a claim for the other spouse for loss of services (consortium claims), and most awards will include compensation for economic damages (lost pay, reimbursed medical bills, etc.) in addition to pain and suffering. The pain and suffering award belongs to the injured spouse, the loss of services to the non-injured spouse, and the rest potentially to both of you. So, like the bonus payment, require full and complete disclosure, and assign a percentage to be paid to both spouses, likely one-half for economic damages sustained during the marriage.

Pending Workers Comp Claim – By comparison, a workers compensation claim is entirely for loss of wages, not pain and suffering. For some employees, the works compensation benefits will be paid regularly for loss of pay, plus a back-payment for the time between the date of work loss and the date benefits went into effect. Talk with your lawyer to decide whether to treat that back-payment as property to be divided between the two of you or as income to the recipient for support purposes.

Taxes – If you divorce before the end of the tax year, and cohabitated priorto, decide who gets to claim the marital home for tax purposes, including deductions and credits for such things as mortgage interest, property taxes, certain energy-saving repairs, and so forth. For example, mortgage interest is a sizable deduction, one both of you will probably want to take if you cohabitated, and you could trigger an audit if you both deduct all of it. You could simply defer to the tax code (which tends to favor the person residing in the home the longest, or the person with the higher income, and usually both), but the tax code also usually allows divorcing spouses to deviate and come up with their own plan. The best thing to do is meet together with  a CPA to decide whether to delay your divorce until after December 31st; or divide the exemptions/credits/deductions at tax time; have one spouse take them and pay a percentage of the return to the other spouse; or have one spouse take them and include the refund as income for purposes of support.

Whatever you do, do not assume that only the property you each have now should be divided when you divorce - these future payments are valuable, sometimes even more valuable, and  should be addressed in your divorce, too.

IT’S NOT ABOUT THE SHOES: HOW TO HANDLE PERSONAL PROPERTY DIVISION

You’ve probably heard by now that businessman/divorcee Daniel Shak is suing his poker playing ex-wife over the designer shoe collection – all 1,200 pair with an estimated value of over $1 million – that she acquired during their marriage. According to him, she kept the pricey heels hidden in a secret room. No, he does not want one-half of them, nor the 35% of them he says he is entitled to per their divorce settlement. Few people walk well in 6” stilettos, anyway, and patent pumps or glitter platforms probably won’t go well with his suits. What he does want, however, is what everyone wants when personal property is at-issue in divorce: MONEY.

The problem is, once your divorce is final, it is difficult to re-open the proceedings to fight about those shoes, or anything else related to property, for that matter. The property division terms in your divorce decree are intended to be final, binding and non-modifiable – and the judge really does mean final – absent compelling circumstances. Those circumstances must amount to fraud, duress or mutual mistake. Just not taking advantage of investigating, whether it is inside your wife’s shoe closet or otherwise, won’t cut it.

Thus Shak’s accusation that his ex-wife’s room was “secret” and that she concealed her shoe collection from him. If handled correctly, however, you can keep your divorce from turning into a post-divorce investigation into your ex-wife’s belongings, like Shak’s, and a costly one at that. Consider one or more of these steps:

1. Inspect. If you are suspicious of what your wife has hidden in your home, car, office, or otherwise, chances are she has the same suspicions of you. Take advantage of this by agreeing to inspect the home, cars, offices, etc., together to confirm for each other that nothing is hidden. (Just make sure you aren’t hiding anything).

2. Litigate. Rather than hire an appraiser, send an interrogatory (a question) to your wife that asks her to value your home contents. If you have a value in mind, and you suspect hers would be lower, send her a request to admit (another question) that asks her to agree with your value or, if she cannot agree, state with specificity her value and why she chose it. These are legal tools that allow you and your wife to narrow the issues and commit to certain facts (like value) in your case.

3. Negotiate. Take pictures of each room in your home (some things have a funny way of “disappearing” during a divorce), and spend time creating a spreadsheet that itemizes the property and your guesstimated value. You can find comparables online at www.craigslist.com and www.ebay.com. Use your spreadsheet to negotiate which spouse takes what, and be sure to include a sum at the bottom that indicates the value of each spouse’s share (ideally one-half each) to justify your proposed division.

4. Value. Do not shy away from an appraiser. If you and your wife cannot select one, ask the divorce court to appoint one as an expert. Be prepared with names, and do your research, because you may have to pay the costs as the spouse requesting the appraisal.   A good appraiser will spend a day or two during non-intrusive hours going through your home, item of property by item of property, and produce an itemized report of each item and its value. These reports are excellent starting points for negotiating who gets what (like the spreadsheet) and are eye-opening (you will be amazed by how much “stuff” you own and how much it is worth).

5. Assess. All of this being said, there comes a time when spending on attorneys and appraisers is not worth the anticipated benefit – a couple of items of property that you may not want after your divorce, anyway. Before you endeavor down an expensive path of litigating, investigating, etc., consider whether all of the time and money is worth it based on your wife’s habits during your marriage and the likelihood that she actually does have something hidden. Sometimes the pros do not outweigh the cons, and you will have a smoother divorce moving on content that what you have is what you will get and neither of you care to worry about what the other has.

Otherwise, you could find yourself, years later, regretting that you did not pay more attention and did not care to value those items your wife desperately wanted– and she could be, like Shak’s ex-wife, (literally) walking away with lots of money.

CAR TROUBLE? WHAT TO DO WHEN REFINANCING WON’T DO

So your spouse is keeping the family car that is leased or loaned in your name, huh?

Most folks in your position would worry that the now ex will “forget” to make the car payment, or will not pay off the loan in time  or will wait to the last minute to do either and let your credit score take a hit in the meantime (out of spite or sheer enjoyment or otherwise). What’s worse, if your ex is unable to assume liability for the lease or refinance the purchase loan, then even if your divorce judgment says your ex is responsible for the payments, the car creditor will come after you. This is because the creditor is not bound to your divorce judgment and, frankly, does not car what your  now ex- agreed to do with the payments. Instead, the creditor will take the payment from you, or even sue you for it, then force you to pursue your ex for reimbursement.

What can you do to avoid this result if your ex cannot refinance? Consider these options --

Option 1 – Take It. The “soccer mom” van might not be the best of rides, but, if you take it, at least then you know when you make payments, that it has insurance and when, if at all, the time is right to trade it in for another vehicle. More likely than not, the vehicle will not have equity, which means you will not have to pay your ex to take it off your ex’s hands, anyway.

Option 2 – Pay It. If you prefer that your x keep the vehicle but you still want to be sure it is paid for it, then you pay for it. You could make the payments outright, as a monthly property settlement payment that is non-taxable income to your ex (and not deductible for tax purposes to you) or as alimony (that is taxable to your ex and deductible to you). Or, in most state child support schemes, you can treat the monthly payment as child support and deduct it from your child support obligation. Child support, after all, is intended for your child’s daily necessaries, and transportation to and from school, sports and activities is chief among them. However, be sure your child support order provides that you will make the payment directly to the car creditor – otherwise, you will have to rely on your ex to make the payment, and timely, or hope that your ex does.

Option 3 – Repo It.  Finally, if you do not want the vehicle and you are not paying child support or alimony, be sure to give yourself the rights of a repo man if your ex misses or delays payments. In most jurisdictions, spouses’ agreements for dividing property – including what happens when one of them defaults in an obligation – are enforceable as a matter of contract law. This means, the spouses can be creative, give each other rights and obligations, and the court must enforce them absent a public policy reason (e.g., you cannot contract to set the vehicle on fire if your ex misses a payment). So, get creative! Require in your divorce judgment, as you would with a contract, that ex provide you proof of efforts to refinance the debt every month, proof of timely payments, proof every quarter that the vehicle is properly insured, money for every day that the payment is late, attorney fees and costs if you have to sue your ex for payment, and/or an extra set of keys that you are to use only if your ex defaults in the payment obligations  and you decide to take possession of – and responsibility for – the vehicle thereafter.

Otherwise, you could very well find yourself paying for a vehicle that is not yours – while your credit score takes a hit -- and that you cannot regain, while your then ex-wife drives off scot-free.

Dividing Personal Property: When and How to Fight Over the Pots and Pans

It’s a dangerous clause in your divorce decree: “Each party takes the personal property in that party’s possession, free and clear of any claim of the other.” This clause is most often an       after-thought, tucked away in the boilerplate, something to tidy-up the divorce after the big items – the pension, the home – are divided. With it, every last piece of personal property (that is, everything but land and what’s connected to it) is accounted for, from the sleeper sofa in the living room to the sleeping bags in the shed. On the eve of trial or the brink of settlement, it is easy to toss in the towel and add this clause just, in the words of one of my clients, “to move on.” After all, it makes little sense to spend $2,500 in attorney fees fighting for $500 in personal property, and no one wants to look like the wacko bickering over Christmas decorations and the pots and pans.

But, if handled correctly, your personal property does not have to be– and should not be -- an after-thought.

First, most items that you acquire during your marriage, what we call your marital property, are dividable when you divorce. (There are exceptions for inheritances, gifts and, in some states, items you and your spouse agree to treat as one’s property, but most items are marital property). It does not matter whether one spouse purchased the item, whether one repaired it, whether it is titled to one’s name, etc. For example, your power tools are marital property, and your spouse could stake a claim to them, even though you purchased them, you used them, and your spouse cannot distinguish the drill from the nail gun. Marital property does not lose its character as marital property simply because one spouse uses the item during the divorce, either. For example, the home furnishings, television, computers, etc., at home are still partly yours even if you move from your home and your spouse uses them.

Why does this matter? Money. Every item of personal property has a value. Granted, individually they may be small ($5 for the plates, $10 for the books). But, combined, they add up! A fully furnished, three bedroom, two bathroom home with a family computer, a washer and dryer set and a tool shed would have, even at garage sale prices, between $3,000 and $5,000 worth of personal property. An equitable share, around one-half, is yours. Now, let’s say when you divorce your spouse will retain your home, and all of the furnishings, but the divorce court orders you to pay $1,500 toward attorney fees or credit cards so that your now ex can make the first mortgage payment. Well, your ex has already retained your share of the personal property – in an amount that could exceed the $1,500 you owe!  If you pay, you pay twice: once in cash, once in property. And in today’s economy, who could afford to do that?

Second, personal property creates ambience, marks your lifestyle, makes you you. It is OK to be attached to a set of wine glasses or to insist on keeping a particular painting, to ask for a book your mother gave you or the quilt your grandmother made. Garage sale prices will not do because these items mean more to you than an everyday buyer. Therefore, the law gives them sentimental value. Sentimental value is the intrinsic worth of an item, which the divorce court cannot easily value because the value depends on you, not the market. As a consequence, usually the item is not part of the marital property to divide. Instead, the court will award the item to the spouse requesting it if the award is reasonable. So, if you have your eye on a family heirloom, a particular framed picture, a hand-me-down tool set, or anything else the value of which is “priceless,” be sure to identify it as having sentimental value, and be prepared to explain to your spouse and the court why awarding it to you is reasonable.

Finally, with the right resources, personal property is not difficult or tedious to value.

1. Litigate. Rather than hire an appraiser, send an interrogatory (a question) to your spouse that asks to value your home contents. If you have a value in mind, and you suspect your spouse’s would be lower, send a request to admit (another question) that asks for agreement with your value or, if your spouse cannot agree, state with specificity the believed value and why. These are legal tools that allow you and your spouse to narrow the issues and commit to certain facts (like value) in your case.

2. Negotiate. Take pictures of each room in your home (some things have a funny way of “disappearing” during a divorce), and spend time creating a spreadsheet that itemizes the property and your guesstimated value. You can find comparables online at www.craigslist.com and www.ebay.com. Use your spreadsheet to negotiate which spouse takes what, and be sure to include a sum at the bottom that indicates the value of each spouse’s share (ideally one-half each) to justify your proposed division.

3. Valuate. Do not shy away from an appraiser. If you and your spouse cannot select one, ask the divorce court to appoint one as an expert. Be prepared with names, and do your research, because you may have to pay the costs as the spouse requesting the appraisal. A good appraiser will spend a day or two during non-intrusive hours going through your home, item of property by item of property, and produce an itemized report of each item and its value. These reports are excellent starting points for negotiating who gets what (like the spreadsheet) and are eye-opening (you will be amazed by how much “stuff” you own and how much it is worth).

The alternative is to leave your property with your spouse. Maybe the pots and pans mean little, but the pots and pans and televisions and bedroom sets and books, etc., etc., mean an awful lot – and you could walk away from thousands.

Nine Major Money Mistakes In Divorce

The “simple and cheap divorce” is a myth.

Even simple divorces require work, such as divorce decrees that tie-up all lose ends (effective enforcement language, any one?) and post-divorce property transfer documents (deeds, notifications for COBRA, promissory notes, to name a few) to make those decrees work.        And cheap divorces should include money spent wisely.

I write should because the “cheap divorce” really refers to two divorces -- the cost-effective divorce and the avoided-costs divorce. Unfortunately, in pursuit of the cost-effective divorce, and under the mistaken belief that their wives are paying less and have, therefore, somehow “won the case,” too many men make major mistakes when it comes to their money – the very thing they are trying to avoid.

Make these mistakes, and your “simple and cheap divorce” will cost you a fortune:

1. SHE HAS TO PAY HALF THE DEBT, RIGHT?

            Most jurisdictions apply a rule called “equitable distribution” or “equitable division” to divide assets and debt. The rule sounds an awful lot like “equal” division, and, sometimes, it is. For example, retirement accounts (usually, the husband’s) that accrued during the marriage are divided equally between ex-spouses. However, the same is not true for debt. “Equitable” really means, do what is fair, and, for debt, that usually means the spouse who earns more pays more. Do not go racking up a credit card bill with the assumption that your wife will be responsible for one-half the balance. If she earns less than you, she won’t.

2. THE INHERITANCE IS TO ME, NOT US

            If you received an inheritance, you might think all of it is yours – after all, your name appears in your generous great-aunt-somebody’s will, not your wife’s. Not necessarily.              In general, any property  you acquire between the date of your marriage and the date of your divorce is considered marital property eligible for division (for those of you living in community property jurisdictions, the same rule usually applies). An inheritance might be your separate property, but only if you did not commingle it with marital property or treat it as marital property during your marriage. And that is tough to do. Imagine receiving an inheritance of $20,000 and just leaving it in an account, in your name only, sitting there, and not touching it at any time during your marriage. Most spouses don’t, especially in our economy. If you used that inheritance during the marriage, if you added it to a joint bank account, or even if the divorce court believes your wife needs a share of it, that inheritance is not yours – it’s your wife’s, too. The best thing to do, if you receive an inheritance, is title the property in your name only, deposit the money into an account bearing your name only, and do nothing but leave it alone – until you are safely divorced.

3. BUT THIS CAR HAS ALWAYS BEEN MINE

            It’s painful, but most guys’ precious belongings become prime targets in a property dispute. Some guys will buy a toy – an old car to fix-up, a train collection to repair – as a hobby  and diversion during a divorce. The problem is, those toys are property, too. Anything you do that causes the property to appreciate is work you are doing for your spouse, too. The best thing to do is leave all your precious belongings alone – don’t go fixing up that car or collection, because the more valuable it is, the more likely you will have to sell it, give it to your wife or fork over some cash to buy her out of “her share.”

4. I KEEP THE BANK ACCOUNT, SHE GETS THE RETIREMENT

            A bank account and a retirement account may have the same balance on paper, but that does not mean they have the same value. In the pursuit of a quick settlement with liquid assets, and hoping to avoid an expert’s fees, some guys will swap a bank account for a retirement account. The problem is, $50,000 in the bank now is not the same as $50,000 in a retirement account now. For one thing, to the extent you can access the retirement account, usually you must pay penalties and taxes for making a withdrawal. For another, there may be hidden costs, such as a loan in repay-status, tied to that account. On the other hand, a future stream of income is usually more value, the present day value, than cash. It’s worth a meeting with a CPA or other specialist to have those accounts valued.

5. SHE CAN HAVE ALL OF THE HOME CONTENTS

            The household furnishings and holiday decorations may seem insignificant to you, but agreeing to give your wife “all the home contents” or “whatever she wants out of the house” is like writing a blank check – for thousands. Think about it. The computers, televisions, china, entertainment systems, books, etc., all have a value. And that value really adds up. Don’t be afraid to have your home contents appraised so the value is taken into account in your overall property division. Otherwise, the divorce court is likely to assign no or a nominal value to those contents.  Obtain the appraisal before you make the argument to your wife’s attorney or in court, though – most judges, and even some attorneys, will dismiss an argument that all of that stuff has value until they have an appraisal in hand.

6. BUT WE GAVE HER THE HOUSE (SECURITY)

            You wife might want the house, and she might be able to afford it, by awarding it to her in your divorce decree does not release your liability to the mortgage company. You and your wife can make any agreement you want; the mortgage company does not care and, if she misses a payment, will pursue you for it. That means calls, collections letters and, possibly, a lawsuit. What are you to do if you have to make the payment for her? Most guys, while fearful that this will happen, do nothing in their decree to protect themselves if it does. Get creative – so long as the decree is not against public policy, the judge will sign it. For example, if she misses                a payment, you withhold alimony (more on that in the next mistake), or you get to assume        the payments and possession of the home, or you can demand the home be listed for sale and    the profits, after repaying you, divided, or you keep them. Better yet, require her to refinance     the mortgage and provide you with proof of her attempts on a regular basis until she does so.     The worse thing to do – and also what many guys do – is require her to “refinance.” This means nothing if you don’t have the enforcement language to back it up.

7. I REFUSE TO PAY ALIMONY

            Alimony is not all that bad – really. Many guys refuse to pay alimony because, they think, writing a check every month for years to an ex (who is an ex for a reason, after all) is tantamount to relieving the divorce every month for year. However, alimony is tax deductible from income to you and taxable as income to your ex-wife. You should think of it as a tax planning measure. If you have a choice of paying $5,000 a year as a “property settlement,” which is not deductible to you, and $5,000 a year as spousal support, which is, go for it. Just be sure the support amount is not modifiable upward; otherwise, your ex could reap the benefit of your pay raises post-divorce.

8. SHE NEEDS SUPPORT NOW, SO I’LL PAY IT

            If you pay child support, you will get the sob story: I haven’t received the check, I need extra money for clothes, etc. It’s tempting to make a direct payment, lest you leave a kid without food to eat and a bed to sleep on. But this is a trap. Make a direct payment, and, in most jurisdictions, you will not receive a credit toward the child support you should have paid unless the paying parent keeps a copy of the payment (no cash, please!) and a receipt and both parents agree the payment was intended to replace that support. In many states, the direct payment is        a gift – no ifs, ands or ors about it. That means, you must pay the same support twice.

9. I DON’T NEED A CPA

            Too many men would rather save costs by figuring our tax consequences on their own, maybe with one of those programs you can buy at the grocery store, or, worse yet, ignoring them altogether. However, a divorce is not just about dividing property, venting over who cheated or lied or whatever else went wrong, and making provisions for child welfare. It is a complex transaction that is rampant with tax consequences. What can I deduct? How can I avoid an assessment for property awarded to me? What happens to investments? What filing status do we use? Who claims the children as dependents? What if we owe taxes? You can make agreements in your divorce decree to answer all of these questions. Spend some time with a CPA, in addition to your attorney, to strategize.

But cheap out, and you will make a major money mistake.

WHAT TO DO WITH YOUR TIMESHARE

Timeshares are one of the most difficult assets (or liabilities) to divide at divorce.  Sometimes, the vacation spaces are so luxurious that spouses cling to them like a lottery ticket arguing over who gets to go on those vacations after divorce.  More often, however, those promises of luxury and affordability in the heyday of the timeshare business have bellied-up, and what once looked like a good idea has turned out to be years riddled with taxes and fees, strict usage schedules and a vacation no one wants and you cannot sell.  In other words, this is not something you want to deal with every year with your ex-wife.

Then what can the two of you do now with that timeshare so that neither of you have to deal with the other later? Talk to your lawyer, and consider these options –

Award It – If one of you wants the timeshare more than the other, and can afford it, then award it to that spouse. It makes little sense to fight over a timeshare you really do not want. However, keep in mind that the timeshare is either an asset or a liability. Have it appraised, and include equity, if any, to be divided between the two of you. If you keep the timeshare, then one-half goes to you spouse. If your spouse does, then one-half goes to you. If there is debt, then make sure your agreement has very specific terms for how that debt is paid and when. At a minimum, require your spouse, if she keeps it, to refinance or otherwise remove your liability within a set period of time, otherwise the timeshare goes to sale, and you may have first dibs to buy it.

Sell It – If the two of you absolutely cannot agree, or your spouse want the timeshare but cannot remove your liability, then sell it ASAP. Ideally, this will occur while your divorce is pending and not yet finalized so that the two of you can pay whatever costs are incurred from your joint funds before you divide them. If this is not possible, then whoever pays the costs should be reimbursed post-divorce (e.g., by taking less or more of a bank account, home equity, etc., or receiving a promissory note and pay back with interest). If there is a loss the two of you must pay, then consult with your lawyers and a financial advisor to determine if you can free funds from a retirement account o pay it and, if so, how.  If there is a gain, then, again, consult with your lawyers to determine what the tax consequences are and how to divide it.

Share It – In exceptional circumstances, you and your spouse may be able to share the timeshare post-divorce.  This is rarely done, and we would discourage it for all but the most exceptional, good-natured divorces. Your agreement must specify who receives the vacation time when (e.g., year by year, two years in a row, equally  each year), as well as who pays what fees when and what happens when that person fails to pay. Consequences for nonpayment are key. For example, if the person who is suppose to pay fails to pay timely, then that person should forfeit the vacation time and the now-exes must meet to decide how to address nonpayment going ahead. A one-time nonpayment may be OK, but a repeated failure to pay essentially award the vacation –and the debt – to one ex who may not have anticipated it, and this should cause both to sit down and reevaluate options  1 and 2 above instead.

Whatever you do, do not wait for the eve divorce to decide what to do with this timeshare. There are a lot of contingencies, intricacies and fees involved with these timeshares that need thorough investigation and consideration. But, have that discussion early and often, and you may be the one enjoying a vacation after your divorce.

WHAT HAPPENS IF SHE DIES FIRST? AND OTHER QUESTIONS TO ASK

If you and your wife are like most divorcing couples, one or both of you obtained or contributed to a retirement account during your marriage. In all states, retirement accounts are marital property eligible to be divided between the spouses at divorce, and, in most states, the rule requires a fifty-fifty division for the amount that accrued during the marriage – regardless of which spouse actually contribute in work hours and pay to the account. Yes, there are some, limited exceptions to this rule, such as a prenuptial agreement and circumstances of financial or marital fault – but these are rare exceptions. And that’s a hard reality to face for a guy who’s spent several decades working to retire peacefully only to learn that the wife who is divorcing him is taking half of his work efforts with her.

“Fifty-fifty,” however, only begins the inquiry. Whether settling your case or preparing with your attorney and financial advisor for trial, be sure to ask these essential questions:

1. What if I am already in pay status?  If you are already receiving payments from your retirement account, then your and your soon-to-be-ex’s options for dividing the account are limited. Generally, she must receive her share of the payout as you receive yours. In other words, she cannot liquidate her share or wait to her retirement age to begin receiving her share. One or both of you may also be precluded from naming survivors, other than each other, to receive benefits upon each of your deaths.

2. How will pre-marriage amounts be treated? While your during-marriage work efforts are all marital, the amount of your retirement that accrued prior to the date of your marriage is yours, unless the court finds compelling need to invade that share. Be sure to identify the “date of division” as the date of marriage through the date of divorce (or separation, or some other date the divorce judge selects), rather than the date of commencement of the account, to keep that premarital share all yours.

3. What happens with the money I contribute after divorce? Similarly, the amount of your account that accrues after your date of divorce is your separate, non-marital property. Be sure your agreement specifies the end-date for your fifty-fifty division as the same date of divorce, date of separation or other date set by the divorce judge to preserve those later contributions.

4. Can I divide this the way I want? Retirement accounts come in all types of complex set ups, some being tax-deferred, others not, some guaranteeing lifetime benefits, others not, and so forth. Under federal law, plan administrators for many of these plans have exclusive authority to determine what types of divisions are permitted. Also consider timing and the tax consequences for withdrawing funds, rather than transferring them incident to a divorce judgment. For example, some of the Big Three in the automotive industry require specific trusts for survivors or irreversible selections of benefits. Therefore, before finalizing your settlement offer or trial brief, consult with your plan administrator to determine which options are actually available to you and your spouse.

5. What happens if my ex predeceases me? If your retirement plan allows, you and your spouse may agree that each other will be the beneficiary for survivor benefits (rather than a new spouse or someone else). Or, you may decide that your then-ex will not receive any survivor benefits, or will only receive a portion so that you can name someone else (a child or second spouse) as survivor for the rest. Check with your plan for the options available to you.

6. Can we equalize? Some retirement accounts require specified orders, called domestic relations orders, or DROs, to divide. These orders can be expensive to prepare, and some plans require pre-approval, at an additional cost to the spouses, before account division. If you and your wife have multiple retirement accounts, consider having a financial advisor equalize the accounts –that is, determine which ones each of you will keep and how much to divide so that you each have an equal amount of retirement - so as to minimize the number of DROs to purchase and approve.

7. Is a life insurance policy better? Depending on your ages and whether your retirement is already in that pay status, you might find that the premium for a life insurance policy on          your wife is cheaper than the cost to divide your retirement and allocate a survivor benefit to your then ex to receive after your death. Always check with your financial planner to determine the best policy, if any, for your family. And be sure to address the costs for this policy in your divorce judgment.

            Most of all, do not accept “fifty-fifty” and move on. Yes, it is often a bitter pill to swallow, but if you are going to divide your retirement, you must make sure you are dividing it in the most financially effective manner.