October 12, 2009 by wendy.

The recession has changed the face of divorce.  Divorcing couples have a lot less money to spend, and the dividing the assets and debt has become even more important than ever.  Couples are often angry and emotional when going through divorce, and all too frequently, one or both parties’ initial reaction is to “get an attorney and go to court.”  In some cases, hiring an attorney is necessary and the smart thing to do.  There are some pitfalls, however.  Attorneys often help clients settle out of court, but the cost is high – both emotionally and financially.  And using attorneys to settle a case is often a matter of positional bargaining – one wherein more “stuff” for one person means less for the other party.  Litigation is even more expensive and emotionally draining. 

One way to potentially save money on divorce is through mediation – if both parties truly want to try to settle.  Mediation is usually “interest-based,” in that the mediator helps the parties to satisfy their interests and concerns in the divorce, rather than just dividing the pie.  So – not only can mediation be a more-cost effective solution, the outcome can be creative and include any number of issues that are important to the divorcing couple, but not necessarily to an attorney.  Moreover, the parties are more likely to adhere to the settlement if they have a role in creating their settlement.

These days, any settlement agreement (called a Memorandum of Understanding by many mediators) should be very thorough.  The rocky economic times in which we live dictates that a good agreement should contain any number of “what-if?” clauses.  What if the house doesn’t sell?  What if one of us loses our job?  What if one of us gets sick and can’t make the payments as agreed?  What if the spouse getting the house cannot refinance?  These and other questions that are germane to each couple’s situation should be included in a settlement agreement these days. 

In mediation circles, there is an expression, “If you litigate, you lose.”  Although a dramatic expression, there is some truth to this.  With mediation, couples maintain control of the process, expenses, and potentially, the outcome.  With litigation, couples put much of their control in the hands of attorneys, the expenses can increase dramatically, and the outcome is often a crapshoot in the courts.  Even if the couple does not go to court, and the attorneys are very involved in settling the divorce – and all too often their focus is strictly on dividing the marital assets.  They may or may help to resolve other, often personal, interests that are important to one or both of the parties.  Additionally, attorneys may or may not be aware of the taxes and the long-term impacts of the settlement on one or both parties. 

Be aware that just because you may be going to mediation for your divorce, you can still consult an attorney.  An attorney will be able to provide good, legal advice, especially for more complex cases.  At a minimum, an attorney can review your Memorandum of Understanding to make sure your legal interests are covered.  Moreover, if the mediation is not successful (and not all are have positive results), you always have the option of stopping the process and going to attorneys.

Mediation is a potential solution if both parties truly want to settle their divorce without attorneys and litigation.  It can achieve a win-win outcome, address the couples’ interests and concerns, and result in a more positive adherence to the settlement, all at a possible lowered costs.  It is not necessarily the right approach for each couple and each situation – but it is important that both parties know and understand their option.

Posted in General Divorce Issues, Money and Divorce, Divorce Mediation | Print | No Comments »

October 8, 2009 by wendy.

Although all economies go through cycles, our current economic situation is unusual.  In this particular situation, we had the “perfect storm” economically speaking.  People were in over their heads in credit card debt, their houses had second and even third mortgages, interest rates on debt were increasing, and the value of their homes was shrinking.  Add to this mix the unemployment rate rising, and business incomes dropping and the economy slid into a nasty recession.

Regardless of the economic situation, people will still get divorced.  How do people handle their debt situation, a house that is worth less than their mortgage, and a possibly lower income situation?  In addition to these money woes, what if they are also faced with a possible bankruptcy?

Bankruptcy and divorce become a dicey area.  Which should come first - the divorce or the bankruptcy? 

Let’s say that the divorce is final and your ex-spouse declares bankruptcy.  Even if the under the terms of the settlement agreement your ex is supposed to pay for certain debts, if he or she declares bankruptcy and your name is still on the debt, the creditors can still come after you. You could get stuck with the debt. You may be able to go after your ex in court, but only after the damage is done.  And – you may be able to get very little relief if he or she has very little income or property.  In this case you should consult an attorney. However, in addition to having the creditors hound you, your credit score could be adversely affected, resulting in higher interest rates, an inability to possibly refinance your house, or even to get credit.  To add insult to injury, if you have taken cash as a property settlement in lieu of other assets (such as a 40lK), you may be required to use the cash to pay the creditors.  You, too, may be forced to declare bankruptcy.

Before 2008, many bankruptcy attorneys used to generally tell clients to get divorced and then file for bankruptcy – because this way, the property settlement was firmed up, and clients would know what assets and debts they would receive.  Also, filing bankruptcy after the divorce is initiated, but before the divorce is final, only halts the divorce process until the bankruptcy is settled.  However, economic times have become so tough that many bankruptcy attorneys are now telling clients to declare bankruptcy and then file for divorce after the bankruptcy is settled.  Moreover, if couples file bankruptcy together, they can save the additional cost of another separate bankruptcy filing. 

There are generally two types of personal bankruptcy, and they depend on a number of factors and depend on the size and type of debt, income, etc. 

In a Section 7 bankruptcy, most debts are erased, but there are lower income limits for people to qualify.  In a Section 13 the debtor is put on a repayment plan and a very tight budget.  People with higher incomes are usually placed in this type of bankruptcy program. 

Seeing an experienced bankruptcy attorney before the divorce can help avoid numerous problems.  For example, a client with struggling business was taking money out of his IRAs to fund living and business expenses.  He was also taking a salary from his business.  Not only were taxes and penalties incurred for the early withdrawal of funds from his IRA, but he was being taxed on his salary as well.  Because of withdrawals from IRA, and his salary, he was making too much money to qualify for a Section 7 bankruptcy, which meant that his debt would not have been dismissible.  He would have had to file a Chapter 13 bankruptcy, whereby he would be on a strict repayment plan.  Not only did he create a large, unnecessary tax burden for himself and his ex-spouse, but he depleted an asset that didn’t need to be depleted – his IRA.  Remember - IRAs are generally protected from bankruptcies up to one million dollars.   See a bankruptcy attorney before divorce – or before you withdraw funds from your IRA if you even have an inkling that you might be headed towards bankruptcy.

These days, bankruptcy and divorce often go hand in hand.  It is critical that couples in tough financial situations who are considering divorce, also consult divorce attorneys and financial specialists early in the process.  These professionals can help them with the timing of their divorce and potential liquidation of retirement assets.  To do otherwise can potentially lead to couples losing money that they can ill-afford to lose.

Posted in Money and Divorce | Print | No Comments »