Cover Your Assets: Credit and Asset Protection During a Divorce

John M. Crane

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Real Estate Attorney

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Posted over 4 years ago. 3 helpful votes

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What do I do now? How did this happen? The decision to get divorced is probably the most heart wrenching decision a person will ever make, so it is logical that what happens after the decision will be traumatic. As a person who has been through a traumatic divorce, let me say that you will get through it, no matter how impossible it may seem during the first few days and months.

Perhaps a brief mention of my story will demonstrate the process. I worked full-time when I was in law school. Each day, I would wake up at 5:30 a.m., leave the house by 6:30 a.m. and take the #6 Subway from my home in the Bronx to lower Manhattan where I worked for the New York City Law Department, approximately one block up from the World Trade Center. I would work from 8:00 a.m. until 4:00 p.m., then rush to the subway, get out in the Bronx, and drive up the highway to White Plains, NY, approximately 20 miles, where I would have a 6:00 p.m. law school class. By the time I returned home, it was usually 10:00 p.m. or later, and my wife was either watching television or in the shower. Dinner was either leftovers or fast food, and then I would wash up for bed. By the time I went to bed at 11:30, I was usually too tired to be a husband and just fell asleep. Maybe on the weekends! Anyway, Saturday was an all-day studying marathon and the only time I had for my marriage was on Sunday. Not being in law school, my wife had no idea that this was not fun, or that I was miserable running around like a chicken. All she knew is she felt lonely. Needless to say, we ended up getting a divorce within a week of my graduating from law school, when I did not even have a job because my job with the City was classified as “temporary" and terminated upon my graduation. Thus, I had no money, no job and no wife! To make matters worse, my father was dying of cancer and I had to provide for my mother who was blind.

The first couple of days were sleepless and filled with emotion. Good friends listening to your misery really are an important resource during this time. It is also more important to have the resolve to decide that you will start over and not quit. A divorce does not mean that you are a loser. It only means that you and your spouse are incompatible, or that for whatever reason, at that point in your life, you and your spouse did not put your marriage above all else. However, you should be honest with yourself and take the time you now have to rid yourself of your bad habits, improve your communication skills, and become a better person. My divorce has nothing to do with protecting your credit and your assets, but my surviving a divorce certainly does! When you make the decision to get divorced, or when you have been served with papers indicating that your spouse has already made that decision, you are then faced with the need to protect your assets and credit reputation. Going from Mrs. Smith to Ms. Jones involves more than just beginning to use your maiden name once again. To begin, you must immediately begin to think of yourself as an individual. Your credit means your credit. Your assets means your assets, and even if they are currently in both your names, you will soon be living as a single person and proper planning is critical to your financial, mental and emotional health.

Although a divorce is a very emotional process, you cannot let emotion get the better of you. Even if your spouse cheated or did some horrible things, you must find a way to keep the anger and resentment out of the divorce. The reason I say this has everything to do with finance and nothing to do with parting as “friends". According, to compassdivorce.com, the average litigated divorce, which settles before trial, costs each spouse approximately $60,000.00. Allaboutlifechallenges.org estimates that such a case would cost each spouse approximately $75,000.00 each; and if the case proceeded to trial, approximately double.

Much of this cost is due to the acrimony between the divorcing spouses. Unfortunately, most divorce attorneys are advocates and litigate vociferously for their client. While this might be a blessing to have such an attorney represent you in most situations, in a divorce where the marital assets are finite, the goal should be to maximize the amount of money each spouse exits the marriage with, and not to have an attorney fight for every advantage. If maximizing the division of assets between the spouses was the joint goal of both parties, the legal fees would be reduced and each spouse would exit the marriage more financially stable. Therefore, it is important to realize that if you are getting divorced, no matter who commenced the action, that your financial, mental and emotional health should be your primary focus. If you have children, it is still your health that must be the primary focus, because if you are not thinking clearly, you will be of no help to them.

With this background in mind, most divorce attorneys and their divorcing clients are primarily focused on “assets". However, very few consider the impact the divorce will have on their credit. Additionally, should the couple own a home, even less consider the possibility of amicably resolving their differences by obtaining a home equity line of credit or doing a refinance of the home in order to pay each spouse’s legal fees in full. By taking such action, both spouses are enabling themselves to expedite the divorce process and prevent the possibility of having the attorneys stop work because the parties have run out of money and cannot afford to get divorced.

By failing to properly plan, parties that run out of money are forced to use credit cards or do other things that harm their credit. The longer a divorce takes, the greater the threat to each spouse’s credit reputation. I have written this paper with the goal of having each person understand how to exit their marriage with their credit score as high as possible. Obviously, someone whose home was in foreclosure cannot expect to have the same stellar credit score as a person who had little debt and paid everything on time. But the advice that follows should help divorcing persons maximize both their credit score and their home equity, if any. First, if you are getting divorced, decide for yourself whether or not you and your spouse are candidates for either a mediated divorce or a collaborative divorce. A mediated divorce is the least costly, but both are considerably less costly than a litigated and hotly contested matrimonial proceeding. Generally, everyone is a candidate for both mediated and collaborative divorces unless they are determined to get “revenge"; however, mediation generally involves the parties and a mediator, who may or may not be a licensed attorney, while in collaborative divorces, both parties are represented by attorneys that attempt a “win-win" divorce.

Second, whether with your spouse or through attorneys, depending on which method of divorce you are seeking, consider a home equity line of credit to be taken on the marital residence (or refinance), with the proceeds to be used to pay both spouse’s legal fees. Additionally, this step enables the spouses to exit their marriage in a financially viable position. As an alternative, parties that use their credit cards to pay their divorce attorneys often exit their marriages with their credit cards “maxed out", paying up to 24.99% in interest on the outstanding balances, and with a desire to “sell the home now". By taking the equity loan, the divorcing spouses can negotiate on the sale of their home with greater confidence and usually, obtain a higher price from the ultimate buyer on the sale of the marital home. Next, a divorcing person should cancel all joint credit cards and open new lines of credit in their individual name only. Additionally, you should update your personal information with all creditors to ensure that every creditor have your new address so that all monthly billing statements are received on time and your credit does not suffer because of a late payment. Most importantly, you should ensure that your current mortgage statement is mailed to your new address, so that you will be sure that the monthly statement is paid. One single late payment made on your mortgage can decrease your credit score by 80 points.

Discuss with your attorney or with the mediator the division of any marital debt. Even if you are solely responsible for paying the mortgage until the home is sold, the percentage of debt over and above what is “equitable", should likely be given back to you upon either the sale of the home or division of some other marital asset. For those in community property states, it is presumed that the spouses own each marital asset equally. In common-law states, as is New York, the law requires “equitable distribution". Equitable Distribution looks at the financial situation each spouse will be left in after the termination of the marriage. Although it strives for fairness, equitable distribution does not mean “equal". Other factors are considered such as earning power of each spouse, separate property of each spouse, duration of the marriage, age and health of each spouse, responsibility for the children of the marriage and other factors. Another important step a person can take to protect their credit is to place a Fraud Alert on your credit file by calling one of the three credit reporting agencies (Equifax, Experian and Trans Union). Even the most happily married persons are urged to take this step. This alert makes it very difficult for someone to steal your personal information. In this day of identity theft, everyone should place a fraud alert on their credit file. For those in the process of a divorce, your spouse will be prevented from using your personal information to open credit in your name, even with your information, without your knowledge.

Additional Resources

An additional step that can be taken to protect your credit reputation would be to subscribe to an identity theft protection service, such as LifeLock, which typically costs about $100 per year. Furthermore, the three credit reporting agencies each have a credit protection service, which will notify you whenever your credit file is accessed, a new account is open or whenever your account balances have changed by more than a certain percentage. A credit Freeze will prevent everyone from accessing your credit profile. This is drastic and will not only prevent thieves from accessing your information, but also potential creditors that might want to extend credit to you. However, if your spouse is out for revenge and wants to destroy you, than a Credit Freeze may be necessary. Some people act out physically, some verbally, and many more, in every way they can. When people are going through a divorce, the last thing they want to think about is their credit. However, such an oversight can have devastating effects that can last for years. We have all heard the stories of the bitter spouse who, still reeling after the divorce was over, used their former spouse’s credit card, which was still in their possession, to charge $10,000, $20,000 $50,000, or more. When a credit card is issued to you and you give that card to someone to use, IT IS YOU who is responsible for paying! Finally, please be advised that if your name is on the mortgage and you are going to let your spouse stay in the home, DO NOT LET YOUR SPOUSE TAKE OVER PAYMENTS ON THIS MORTGAGE! You are as responsible as your spouse for any mortgage you obtained jointly. If your ex-spouse stops paying your joint mortgage, the lender can look to you for payment if they foreclose and do not receive enough to satisfy the total amount due. More importantly, such a foreclosure will cripple your credit for years to come. Even if the Court orders your spouse to pay the mortgage, that Order does not supersede your agreement with the bank. You are still equally responsible for paying this mortgage. If you decide to let your spouse have the home, let him or her refinance the home in their own name. If they cannot qualify for a mortgage themselves, SELL THE HOME! The only other alternative is that if the Court were to order that one spouse was entitled to sole possession of the marital home, it is possible to request that your lender permit a “Qualifying Name Delete Assumption”. A Name Delete Assumption leaves the existing loan in place, but relieves the non-occupying spouse from their financial obligations regarding the loan. However, if the lender did not agree, the only way for the non-occupying spouse to be fully protected would be to SELL THE HOME! Proper planning and structure of maintenance and child support payments can play a critical role in your future financial prosperity. Lenders will look to your Settlement Agreement or any Court Orders to calculate how the maximum loan size you would qualify for. If you are making these payments, these amounts will be deducted from your income and you will likely qualify for less of a loan. If you are receiving these payments, and you have received them for at least the last three months, and they will continue for three years into the future, Lenders will add these payments together with your salary and other income in determining your maximum loan amount. What is critical is that these payments be easy to evidence. If the payments are being made to the Court and the Court then writes a check to the recipient, this is clear evidence of payment being made. The Settlement Agreement should specifically state the dates the payments are to begin and end, as well as the age and dates of birth for all minor children benefitting from these support payments. However, in the age of direct deposit, if payments cannot be made to the Court, it is suggested that an account be set up to record these payments. In addition to providing evidentiary support of such payments, this account will also assist in accounting for prior payments in the case of disagreement between the ex-spouses. While the above focused on the credit protection and prevention considerations, as a Divorce Planning attorney, I am frequently consulted regarding college financial planning, estate planning to ensure minor children are protected and guardians appointed, retirement planning to ensure that the divorcing spouse has the assets needed to live independently and many other considerations. For example, in order to protect continued receipt of maintenance and support payments, I suggest that as part of the divorce agreement, that the spouse receiving payment take out and maintain a life insurance policy on the payor spouse’s life. The party making the payments should not pay the policy premiums. The reason being is that if he or she stops paying and suffers a fatal heart attack, the party receiving the payments might be unaware that the policy premiums were unpaid and that the policy was terminated. This spouse would now receive no payments, and if the maintenance and support were needed to pay a mortgage, might lead to devastating consequences. Only a Divorce Planning professional performs the comprehensive analysis necessary to plan and protect every area of a person’s life, ensuring that they exit their marriage mentally, emotionally and financially intact. Other considerations should include changing the beneficiary on a life insurance policy from your ex-spouse to a guardian in trust for any minor children. Additionally, as part of a divorce plan, it might also be recommended that the client have created a Pour-Over-Will that flows into a Revocable Living Trust and assign a trustee to administer the will and trust, as well as both parties obtaining life insurance and naming the minor children as beneficiaries, with a trustee appointed as well. Proper estate planning is critical to protect your loved ones from having to go through probate and risk the loss of critical assets for young children. Qualified tuition plans, such as a 529K, should be created on behalf of the children and be guaranteed to continue to be funded or funded as part of the divorce decree. Finally, in many divorces, one spouse will take the children as an income deduction. This deduction, for proper college planning, should be claimed by the spouse with the least income to maximize future financial aid for college tuition. It is also advisable when starting a qualified tuition plan that the plan owner be grandparent and not the parent. When your child applies to college they will automatically complete a FAFSA; application for student aid. This application requires the parent claiming the child on their income taxes to reveal all of their income and assets. A qualified tuition plan is considered a parental asset even though it is for the child’s education and thus reduces the child’s overall aid, but by having a grandparent as the owner of the qualified tuition plan the asset does not have to be revealed and the grandparent suffers no gift tax consequences. For more information or a confidential appointment you may contact John M. Crane, Esq. at (914) 9377272 or johncrane@johnmcrane.com. http://www.collaborativepractice.com/

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