184 - Best Practices for Dealing with Debt in a Divorce
When going through a divorce, you only get one chance to deal with your debts, so it is critical to get it right. But, dealing with debt can be tricky. In this show, Leh and Todd discuss best practices to handle credit cards, store credit, auto loans, taxes, business loans, mortgages and more.
Leh Meriwether: Welcome, everyone. I'm Leh Meriwether, and with me is Todd Orston. We are your co-hosts for Divorce Team Radio, a show sponsored by the divorce and family law firm of Meriwether & Tharp. Here you'll learn about divorce, family law, and from time to time even tips on how to save your marriage if it's in the middle of a crisis. If you want to read more about us, you can always check us out online at atlantadivorceteam.com. Todd, we've got a good show today. We're going to be talking about debt.
Todd Orston: Well, when you say it like that, I'm intrigued.
Leh Meriwether: So we're going to be talking about how to deal with debt in a divorce. And nobody ever wants to deal with debt. But a divorce, when you have a divorce going on, and there's debt, it can become tricky. So Todd, why is dealing with debt in a divorce tricky?
Todd Orston: Well, there's a few reasons. Number one is because you're dealing with a third party who's not obligated to follow the divorce decree. So, I mean, I have conversations with people weekly. I had a conversation yesterday, where somebody called, and they were like, "Oh, my soon to be ex-spouse is going to take that debt." And I said, "Okay, that's fine. What happens when they default?" "Well, they'll be responsible." Okay, yeah, that sounds great. On paper, it looks great. But the credit card company isn't going to stop from going after you because the debt's in your name. So no matter what you put in, we can put indemnification language in to try and make sure it's very clear the debt is belonging to the other party, but the third party isn't obligated to do anything different. If the debt's in your name, they're coming after you.
Todd Orston: The other thing is that you only get one shot to get it right. And there are a lot of factors that go into what getting it right means, okay? It's not like you can handle it in the divorce, you have the order, and then you wake up a day, a week, a month, a year later and go, "Oh, yeah, this doesn't work. Let's try and change this." Once it's done, it's done. You have to think about things like your budget, your income. If you're taking debt, I've had people say, "Oh, I'll take that debt."
Todd Orston: And then, I look at the budget, and I go, "Okay, that's fine. But that payment, that monthly payment, at the very least, is going to be this. You also have child support, and the house and a car and buppa, buppa, buh. How are you going to make that payment?" "Oh, I'm not sure." "Okay, well, then we need to think a little bit longer about this because I don't want you to agree to something. You're stuck with it, and then you can't comply."
Leh Meriwether: Right. And what people don't realize, so we did away with what's called "Debtors' prison" a long time ago. So debtors' prison, literally, mean, probably I can't remember when we got rid of it, it's been a couple of hundred years, but-
Todd Orston: 97, 98. No, I'm kidding. I don't ...
Leh Meriwether: In years past ...
Todd Orston: Many, many years ago.
Leh Meriwether: ... if you couldn't pay your debts, you literally could be thrown in jail. But they did away with that, and they created bankruptcy law and all that, so there's been a huge evolution of the law. But if you agree to pay a debt in a settlement agreement that a judge incorporates into his or her final order, now that agreement is an order. And if you can't pay that debt, you could find yourself on a contempt action and even find yourself thrown in jail for not complying with a court order. So we only get one shot to do it right. And in some respects, when you establish an agreement or you have an obligation to pay a debt in a court order, now there is in effect a debtors' prison, because in many situations, even in a divorce, you still can't bankrupt out of that debt. That's another complication, that you can't bankrupt out of the debt.
Leh Meriwether: So let's say there's a dual name, or you have a debt that's got the husband and his wife's name is on it. And in the divorce decree, it says, "Okay, the wife is going to take on this debt." A year later, she files for divorce. And from her perspective with this debtor, she's no [inaudible 00:04:38] when it comes to the third party. A third party is someone who's not in the litigation. So most of us having a divorce, it's the husband and the wife. All right? There's no other parties. So this third party now can't come after the wife for the debt, but still can come after the husband. And so they come after the husband for the debt, and the husband or now ex husband turns around and pulls the wife into that court case for contempt action.
Leh Meriwether: So even though she alleviated her obligation to the third party, the credit card company, whatever it really is, she still has to cover the husband for what's called "Indemnification." That's why it can be so tricky and why it's important to get it right the first time. So we're going to talk about some of the most common kinds of debts that we see in divorces and break down how do you deal with it in the divorce. We can't address every scenario in this show, but we're going to talk about common scenarios and common ways to deal with it.
Todd Orston: Let's start with credit cards. I mean, that's a type of debt everybody, most everybody, at one point in time or another has to deal with. And again, I mean, a credit card debt, it's pretty simple. I use the credit card, I incur the debt, I owe the money. So how am I going to now deal with that situation? Let's say you have amassed a sizable amount of credit card debt, and now you're going into a divorce. What are some of the things you should be thinking about?
Leh Meriwether: Yeah, so one of the things that we try to look at, because the best thing you can do when you get a divorce, apart from the children, so we're separate carving up the children for a moment, we like to have everything just clean, try to avoid any sort of thing that keeps the two of you together, financially speaking. And one of the things we may look at is other assets to pay off this debt because you may need to take care of those things. So maybe one of the things we look at is when the house is sold, because that's often the largest equity out there, the largest component of a marital estate is the equity in a home, so the home gets put on the market for sale, it pays off all the credit cards, regardless of who name they are in. And then the party split whatever's left after that, by whatever ratio they decide or judge orders.
Leh Meriwether: So if you can set it up like that, that's very beneficial because then you don't have to worry about someone else not paying their credit card. Of course, perhaps the husband has a $10,000 credit card, and the wife has a $10,000 credit card. That's easy, they each take their own debt because if the wife bankrupts on it later, that's not going to impact the husband's credit score or anything like that, and that's something that people need to understand. If you have an agreement that says that, let's say, the husband is going to take ... He says, "I'm going to pay the wife's credit card, make wife's credit card payments," and he doesn't, or he's constantly late, but she can go after him for contempt, the judge can hold him in contempt, but the judge can't fix her credit score. Her credit score is still going to be ruined because he was not timely making the payments. So that's why you should try to address it, so that you do not have that sudden scenario where someone is paying someone else's debt.
Todd Orston: Yeah. And another factor you need to be thinking about is, I mean, we're sort of assuming that the expenditures in question were reasonable. Obviously, we're not trying to say you just take all the debts, split it right down the middle. That may be what ends up happening, but there are so many other factors. If one party makes all the money, meaning if they are the breadwinner, and the other party not only is unemployed, but maybe their job potential, their income potential is somewhat limited, well, then a 50/50 split may not be reasonable. So you have to look to see what is going to be a reasonable division of that debt. And then, digging a little bit deeper.
Todd Orston: To use your example, let's say each party has $10,000 in credit card debt, with cards in their own name. All right, that's fine. But if mom used $10,000 for stuff for the family, clothes for the kids, food, and dad went to the club, all right, well, then that may be a different argument, where maybe, "Hey, wait, hold on one second, why am I walking away with $10,000 in debt? This 10,000 was for the family, and your 10,000, I don't know, went to bubbles, I don't know who ..." This goes back to, you have one chance to get it right. So yes, sometimes it gets tricky because we do sometimes have to dig in and figure out why the money was spent, meaning why the debt was incurred, in order to come up with a solution that makes sense, that's fair to the parties.
Leh Meriwether: Yeah. And I know this issue is actually dear to me because my wife, when she went through ... I'm her second husband, but her first husband was obligated to pay a lot of bills, and he didn't. And her lawyer never advised her that this settlement agreement does not control the credit card companies, and it dramatically impacted her credit score. But on the positive side, she found places to do what's called "Manual underwriting." And they would see that, well, this credit card, she wasn't obligated, under the settlement agreement wasn't obligated to pay it, and they were able to give her great rates despite the damage to her credit card because she had a very explicit settlement agreement. When we come back, we're going to continue to break down the different kinds of debts and how to deal with them in a divorce.
Leh Meriwether: I just wanted to let you know that if you ever wanted to listen to the show live, you can listen at 1:00 AM on Monday mornings on WSB. So you can always check us out there as well.
Todd Orston: Better than counting sheep, I guess, right?
Leh Meriwether: That's right.
Todd Orston: You can turn on the show, and we'll help you fall asleep.
Leh Meriwether: There you go.
Todd Orston: I'll talk very softly.
Leh Meriwether: Welcome back, everyone. I'm Leh, and with me is Todd. We are your co-hosts for Divorce Team Radio, a show sponsored by the divorce and family law firm of Meriwether & Tharp. If you want to read more about us you can always check us out online at atlantadivorceteam.com, and if you want to read a transcript of this show or read a transcript of the other shows or listen to other shows, you can always go to divorceteamradio.com, which is our website that has the show or anywhere you get your pods. That's what I heard the cool kids are calling it now, podcast.
Todd Orston: Wow, the pods. Yeah. I thought a pod was one of those temporary storage units when you're doing construction at your house. Isn't that?
Leh Meriwether: It's podcast now, it's a short.
Todd Orston: Oh, okay. Got it.
Leh Meriwether: Everything's short now.
Todd Orston: All right.
Leh Meriwether: Okay. So today we're talking about dealing with debt in the divorce because it can be tricky. And if it's not done right, you only get one chance to get it done right, and if not, then there's often bad consequences. We gave some examples of them the last segment. So we're going to continue to break down some of the most common debt scenarios we see. So we talked about credit cards. Did we cover all that on credit cards, Todd? Do you think we got everything? Or the high points, I should say.
Todd Orston: I mean, I did.
Leh Meriwether: All right. Let's talk about something that's similar to credit cards. It's store credit, and you see things like rooms to go, and you often see them with furniture stores, you see some sort of store credit relating to that store, so people buy furniture for their house, and they have all the furniture. I see this happen with some level of frequency, where one person wants to take all the furniture in the house, but there's a $10,000 outstanding debt relating to that furniture, and they're like, "Oh, no, you can take the debt, while I take the furniture." There's like, "What? That doesn't seem fair."
Todd Orston: Yeah. I mean, look, it comes down to a basic premise, and we touched on this already, but the basic premise being you really want to have a clean break. And so if we're talking about a couch and a $5,000 debt, then if somebody is walking away with the couch, in a perfect world, they are walking away with the debt. But when you have a situation where, let's say, one party is the breadwinner and all the credit cards happen to be in their name and they bought the TV and the couch and the kitchen stuff and everything, well, obviously, it may not work out that you're just willing to say, "Okay, well, I guess you're going to get the couch and the TV and all the furniture and everything simply because the debt's in your name."
Todd Orston: But you need to think of it in terms of, okay, but that means that, let's say, one party is saying, "Okay, you can keep this couch, but I have the debt." And if you're going to say, "But you're going to be responsible for the debt," goes back to your point of what if they don't? What if they fail to comply? You can file contempts, you can do all of that, but you still have to file a contempt, you still have to deal with the creditor who's going to be knocking on your door.
Leh Meriwether: So first off, a way to avoid damaging your credit. So let's say the husband's going to be responsible for the debt, to pay the debt, even though it's in the wife's name. Well, so how you do that is the wife writes, you write it in the agreement, the husband pays the wife on a monthly basis the minimum payment, or whatever, pays the wife a payment of X. And then, the wife's responsible for making that payment to the credit card comp or the store credit. And so that way, if the check doesn't come in the wife, the wife can still make the payment, so her credit get doesn't get damaged, but then can subsequently go after him for contempt, because that's one way to preserve your credit score. You're still responsible for what's in your name, but the cash comes from the other party. So that's a mechanism to help protect you, but you still have to chase after him for the money.
Leh Meriwether: Now, like I said earlier, another option is to liquidate an asset of the marriage to wipe out these kinds of debts, to get, like you said, Todd, a clean slate, financially speaking. Often it's the real estate that does it. There are situations where we have done this. So I had a case, for example, unfortunately the parties had like a $100,000 in unsecured debt. It was very unfortunate. Now what was odd is that they had done a great job of maximizing their 401(k)s. So they had 100 grand in debt over here, they had $400,000 and their 401(k). And in a divorce, you can actually liquidate.
Leh Meriwether: Let's say the husband had 400,000. So the way we crafted it was we had an accountant do some math, we figured out what the wife's income was probably going to be the following year or that year, sorry, and the husband transferred $100,000, and then grossed it up to, it may have been like 130 or 140 over to the wife. And so the wife actually netted 100 grand after income taxes because they have to pull that out. There is no tax penalty. If it's a 401(k) liquidation incident to a divorce, and again this is based on law in 2020, there's no 10% tax penalty, but she still had to pay income taxes. She took that, she netted 100 grand, and she turned around with that 100 grand, paid off all the debt.
Leh Meriwether: So they walked away debt free, they didn't have to fight about it later. So we had to craft it very specifically, so she didn't just run away with the 100 grand. But, I mean, apart from them spending a lot of money, they were somewhat fiscally responsible, and they could be trusted to use that money to pay off all the bills. And that's what we did, and it worked out well.
Todd Orston: Yeah, and this is where you need to understand what your budget looks like, you need to understand what your capabilities are. But that clean slate argument, the last thing you want is to not give all these things thought and strategically come up with a plan that is actually going to work with you because I can't tell you how many times we've seen people where they don't give it much thought, and they just say, "Okay, I just want to get out," and they sign on something, and a month, six months, a year later, they're calling back saying, "Oh my gosh, I'm behind on my payments, a medical bill popped up in my car, I got into an accident, and I had to pay that, so I'm not able to pay this and this and that."
Todd Orston: Life happens, and so when you're thinking about debt, that's where I'm saying, it's not as simple as, "Okay, well, let's just do X," right? You need to think is X something you can actually do. And if life happens, not even the major stuff, but if just basic life happens, if you're that close, if you're teetering on that financial edge, so that one thing happens, and the next thing you know you're not making payments, well, you could find yourself in a contempt situation.
Todd Orston: And while I will say judges lean heavily away from jail in these contempt situations, it also just depends on the facts. If you're going on eight trips a year and you fail to make the $300 payment for some credit card, then I can tell you right now the judge may very well think about jail. If on the other hand, life happened and you can show your budget and, "Judge, I ran out of money and I prioritized other things, I'm so sorry," I think jail is a last, last, last resort. But it's still something you definitely have to be concerned about.
Leh Meriwether: And sometimes what you'll do is you'll see the judge say, "Well, let me ask you this. How much is in your 401(k)? Oh, enough to pay off this bill entirely? Okay. Well, guess what? We're going to reset this contempt hearing for two months from now, and because what I'm hearing is you have the ability to pay, you're just going to have to get access to your 401(k), whether it's a loan ... I can't tell you that you have to borrow money from your 401(k), I can't tell you that you have to liquidate your 401(k), because that would be violating the agreement."
Leh Meriwether: The judge can't get creative here, the judge can just say, "I'm hearing you have the ability to pay. You may not have the cash flow to pay, but you have the assets to pay. We're going to reset it in two months from now to see if you come into compliance. And then, if you didn't liquidate something or sell something, and I'm not talking about the car you need for work, but if you have other assets, like a boat and a motorcycle that you're not using on a regular basis, you may have to sell those things."
Todd Orston: Well, the standard in a contempt, for lack of a better way of putting it, you have to show to the court that you have looked anywhere and everywhere, under every stone, for the money in order to comply. You have to look at credit cards, other cards, you have to look at bank, you have to look at friends and family and loans. You can't just go in and say, "Couldn't do it, sorry, high fives, see you next month." The court's going to be like, "Okay, that's not good enough. You have to show you've done everything you can to comply with that court's order, and if you fail to do that, the court will likely hold you in contempt, at which point, whatever the sanctions are, they are."
Todd Orston: I mean, like I said, jail is usually something courts lean away from, but if it's that blatantly wrong, meaning if you clearly just snubbed your nose at the court and the court order, the court might get a little testy and say, "Well, what? Listen, I'm going to ... an all-expense paid trip, no debt, you're not going to incur any debt at the jail, all right? Meals, everything covered, I promise, it's going to be great. We'll see you in a month."
Leh Meriwether: And then next [crosstalk 00:22:03], we're going to talk about auto loans, taxes, business loans, and real estate.
Todd Orston: Hey, everyone, you're listening to our podcast, but you have alternatives, you have choices. You can listen to us live also at 1:00 AM on Monday morning on WSB.
Leh Meriwether: If you're enjoying the show, we would love it if you could go rate us on iTunes or wherever you may be listening to it, give us a five star rating, and tell us why you like the show.
Leh Meriwether: Welcome back, everyone. This is Leh and Todd. We are your co-hosts for Divorce Team Radio, a show sponsored by the divorce and family law firm of Meriwether & Tharp. If you want to read more about us, you can always check us out online at atlantadivorceteam.com, and you can get transcripts of this show and prior shows at divorceteamradio.com. Well, today, we are talking about the exciting subject of how to deal with debt in a divorce. Actually, it's not that exciting. But if you don't pay attention and spend the time to deal with it properly-
Todd Orston: Oh, things get exciting then.
Leh Meriwether: ... they will get very ... Yeah, not in a good way.
Todd Orston: Not in a good way.
Leh Meriwether: But they'll be very exciting. All right, so let's talk about ... One of the inspirations for the show was some debt questions that we had received. So we've been talking about other things, a number of different things. So now we're going to talk about auto loans because that can be a tricky thing as well. Just like with the credit cards, we've seen one of the worst things you can get on your credit score is a repossession. Not only that, but you can be sued. I'll be real quick here. So let's say that you cosigned on a car, you're the husband, you cosigned on a car for your wife, and your wife keeps the car, she's supposed to make the payments, but she doesn't.
Leh Meriwether: The car gets repossessed, they go and they sell it at an auction, and then whatever the deficiency is, so if you owe 10 grand, they sell it for five grand, they can sue you, we mean the husband, for $5,000. And they have the dispossesory, I mean the repossession, on your credit score, and that's devastating. Now you can implead her and bring a contempt action against her, but if she couldn't make the payment, it's going to be hard to get the money from her. So they have to be properly addressed in your divorce decree as well.
Todd Orston: Yeah. Let me go into a little more detail on that, when you say it has to be properly addressed, and this really applies to any type of debt, but especially any debt where one party is keeping the asset, and the other party has the debt in their name. The issue is you need to be very careful, and this is where the language, the terms that go into an agreement, where it gets a little tricky. It's all about the terms, it's all about how are you going to deal with a failure to comply. Where people get into trouble is where they just say, "Oh, okay, well, you're responsible for that debt and making those payments," and you think that's good enough. Right? It's not.
Leh Meriwether: Mm-hmm (affirmative).
Todd Orston: You need to be able to say, okay, let's use your car example. You're keeping the car, the debt's in my name, you're going to be responsible for, meaning the person keeping the car, you're responsible for that debt. Now all of a sudden, you find out that they're not making those payments, and it's going to start dinging and potentially wreck your credit. So what do you do? You can file a contempt. But you didn't have any language in there as to what I call the "What if." Okay, you are responsible for this debt. But what if you fail to comply? Well, if you miss X number of payments, and that could be one, if you miss one payment, this is what's going to happen. What if this happens? Well, then this is what's going to happen. And it could be, "You sometimes, not sometimes," I want to be as clear with that plan as possible.
Todd Orston: "So you're keeping that car, and the debt's in my name, fine. I don't like it, I want a clean slate, but nonetheless the debt can stay in my name, and you'll make those payments. But, but, but, but, if you fail to make one payment, if you are late one time, how about the car will transfer back to me, I will get immediate possession of that car, at which point I can turn around, I can sell it, I can do whatever I want with it. And by the way, if there are any proceeds from the sale, if I'm actually going to benefit, I'm going to get to keep those."
Todd Orston: So now what have you done? You've explained to the court you're not looking for the court to come up with a sanction. The court's going to be limited in what it can do. You are spelling out, "Hey, this is what's going to happen." The same thing goes for real estate, and we'll go into that more later. But you need to be so clear, "This is what happens. I get the car back, I can do what I want, I can sell it, I can do whatever, keep the money." The same thing goes for a house. And I know, like I said, we're going to talk about that. But you need to be very, very explicit in what the sanction you want and what the sanction will be by agreement, because then that limits ...
Todd Orston: Then, at that point, if you're in front of a judge on a contempt, the judge is going to look at the other party and go, "All right, I'm holding you in contempt. And by the way, you need to turn that car over immediately." Then it's a much easier job. The judge isn't trying to decide, "Well, how are we going to get this paid?" Now the judge is saying, "All right, you failed and refused to pay, and you failed and refused to turn the car over. All right, well, I'm holding you in contempt, and you have 12 hours to turn that car back over to the other party. And if not, there's going to be a compliance hearing, and I'm going to put somebody in jail."
Leh Meriwether: Yep. In Georgia, they [inaudible 00:28:18] these things called "Floyd orders," or at least at the time we are recording this in 2020, where the court can say, "If you do not turn over the keys in 12 hours, you need to report to the jail." The point is, you need to address what happens when they fail to make the payment, and you need to address it with a time limit. If they fail to make it, if they're more than 10 days late on the payment, they have to turn the car over to you within five days. And so you have to be specific. You can't just say they have to turn the car over, no, within five days. And then, you can do whatever you want with it. So create that mechanism, so after five days then you can file your contempt. Okay.
Leh Meriwether: So here is a question actually on the issue of auto loans that we've gotten: how can I get the loan transferred to my name? To help my husband's credits grow, I deposited $2,000, and the car is in his name now, and we're getting a divorce, and I've been paying the loan. How can I get the car transferred to my name? Now the problem is most of these places aren't going to just say, "Oh, we'll just transfer the loan to you." What you have to do is you need to go to your bank or credit union and refinance the car.
Todd Orston: It's a refinance.
Leh Meriwether: That's the only way to do it, you have to refinance it-
Todd Orston: [crosstalk 00:29:46]-
Leh Meriwether: They won't just transfer it.
Todd Orston: Right. It's similar to a house. Look, why would a bank want to do that? Oftentimes banks are like, "No, no, no, I've already got somebody on the hook." And it might even be, if they're looking and the person who's on the hook right now is the breadwinner in the family and the person who is not the breadwinner goes in and goes, "Oh, just transfer it over to me," if I were a bank, I'd be like, "Why would I do that? Right now I've got the person who actually has income, who qualified for the loan, and now you're telling me you want me to take them off and make you, who is less financially stable, responsible?" That means that the bank can only go after that person. I can tell you right now, if I'm the bank, I'm not doing that. So you have to go qualify for your own loan, and then transfer that debt over to you.
Leh Meriwether: All right. I'm going to mention taxes because a lot of times we see taxes in a divorce, a debt, a tax debt. Now we're really not going to spend any time, except to say this, the IRS does not mess around, they can garnish your wages without a hearing, they can put a lien on your house without a hearing, they can seize your bank account without a hearing. All these other mechanisms, there's usually a lawsuit, a process that these companies have to follow, not when it comes to taxes. I mean, they're still going to take steps before they do that, you're going to have plenty of notice. Our strong advice is whenever there's debt for taxes involved in a divorce, that, depending on its nature and depending on a number of other factors, if he can't pay it off by liquidating an asset or liquidating part of 401(k) or whatever it may be to pay it off, you need to go talk to a lawyer.
Leh Meriwether: We had a whole episode talking about taxes back at Episode 133, if you want to go back and listen to that, it was with tax attorney Jason Wiggam. And the thing is, the IRS, when you do it right, they actually can be pretty nice, I mean, all things considered. There's a lot of protections out there, especially if you're an innocent spouse. But if you just ignore the problem or don't address it properly, it can get really bad. And the worst thing to do is to go to make your mortgage payment and the cheque bounces because the IRS garnished your account, because a debt wasn't paid. So I don't want to go into any more detail because we took a whole episode just to talk about taxes and debt and tax liens and stuff.
Todd Orston: My only comment is, it's not the kind of issue you want to wait until after the divorce is finalized to figure out, absolutely, because then your ability to look to the court for assistance is gone. All right?
Leh Meriwether: Mm-hmm (affirmative).
Todd Orston: And if you're in one of those situations where we've heard it too many times, "Oh, my spouse hasn't filed taxes in five years," well, red flag. And at the very least, you need to have an accountant looking at all of that information to make some decisions for you or help you make decisions, rather, as to what needs to be done, what needs to be filed, because you don't want to say, "I don't really know what I'm going to do," and then all of a sudden you're filing or the two of you are filing for all those years you were together, the tax returns, and you find out that you're sitting on a tremendous amount of debt with no court direction, by agreement or order, as to how that debt's going to be paid. So please, please, please.
Leh Meriwether: When we come back, we're going to talk about business loans and real estate mortgages.
Leh Meriwether: I just wanted to let you know that if you ever wanted to listen to the show live, you can listen at 1:00 AM on Monday mornings on WSB, so you can always check us out there as well.
Todd Orston: Better than counting sheep, I guess, right?
Leh Meriwether: That's right.
Todd Orston: You can turn on the show, and we'll help you fall asleep.
Leh Meriwether: There you go.
Todd Orston: I'll talk very softly.
Leh Meriwether: Welcome back, everyone. This is Leh and Todd. We are your co-hosts for Divorce Team Radio, a show sponsored by the divorce and family law firm of Meriwether & Tharp. If you want to read more about us, you can always check us out online at atlantadivorceteam.com, and if you want to read transcripts of this show and prior shows or listen to prior shows, you can always go to divorce teamradio.com or listen to wherever you get your pods. Trying to be cool here.
Todd Orston: It's not working.
Leh Meriwether: It's not working. I give up on the cool factor. All right, today we're talking about something that's not really cool, dealing with debt in a divorce. And it gets really bad if you don't deal with it correctly. So now we're down to two other types of debts that we see. We're going to touch on business loans, but we're going to spend most of the time on real estate because that's probably the most common area where people get in trouble. For business loans, I just want to say that most of the time the business loan is tied up with the business, but there are certain situations where personal guarantees have been given. So perhaps the husband owns it, and he's done a personal guarantee, maybe the wife, sometimes the wife is required to do the personal guarantee, especially when you see an SBA loan.
Leh Meriwether: That can get very complicated, so you want to bring in a lawyer who's familiar with this area, you may need to bring in your banker, you may need to refinance that loan or see if it can be paid off because at the end of the day the SBA, when you do that, they put all kinds of protections in place for them, for the bank, Small Business Administration, that's SBA loan. That can complicate things because, kind of like with taxes, they can come in and do certain things to collect that debt, regardless of what the divorce decree says. I mention it, just so that you are aware that you need to look at the loans inside that business, only to see to the extent there may be some guarantees that may attach to the house, for instance. Apart from that, they should stay with the business, but you've got to double check the personal guarantees. Okay, real estate.
Todd Orston: Yeah. Well, before we get into real estate, I just want to also impress upon listeners, especially if you are not the person walking away with a business, sometimes it's easy to say, "Oh, no, no, I don't want the business, you keep the business." And then, you don't ask the right questions. And so, please, please, please, if you're going through this process and your spouse is the one that is walking away with a business, you must ask the right questions to determine whether or not any of the assets you're walking away with are vulnerable to any kind of creditor claim that could be made, because let's say the house was used as collateral.
Todd Orston: So please, it's a very infrequent situation, but I can tell you it is one of the situations where I usually say, "Absolutely, if that's even a potential, you need an attorney, and you may need not just a divorce attorney, but you may need someone who is well versed in business law to be able to really dissect all of the finances of the business to figure out if the personal assets are somehow used as collateral and tied to it."
Leh Meriwether: Yeah. And sometimes, it could be as simple as a car, that maybe there's what's called a "UCC Lien," Uniform Commercial Code Lien on that car. We need to save the rest of the time for real estate, but that was a great point, Todd-
Todd Orston: That's right.
Leh Meriwether: ... that even if you're not the one taking the business, just double check that the debts and the business don't have any other sort of liens you may not be aware of that could impact the property you're taking. Okay, real estate. Todd, I mean, probably if we were to just boil this down to how to deal with a mortgage and a real estate, what are the three most common scenarios to effectively deal with this?
Todd Orston: So usually I tell people, dealing with a traditional husband-wife situation, then husband gets it and pays some amount of money to the other party for their share of the equity in the asset, wife gets it and pays the husband his share, or you sell it and basically whatever the proceeds or debt is, it'll be equitably divided. So those are really your three options. But that's not really where the sticking point is. I mean, coming up with, "What are we going to do with the house," that's pretty simple, wife gets it, husband gets it, or it's sold. But the problem is, when you deal with the issue of, "If I'm not getting it, then if the debt's in my name and there are still some ongoing obligations by the other party, what happens if they fail to comply?" This is what I was talking about, what we were talking about earlier.
Todd Orston: So what happens if, let's say, there's a house in joint names, it needs to be refinanced, and basically then all of a sudden, let's say six months to refi, and six months goes by, and it hasn't been refied. What do you do? Too many people, unfortunately, they just, the language is, "You have six months to refi," and they think they're done. That's where they make a mistake. You need strong language to deal with the what if, to deal with, "Okay, you failed to do it, now this is what's going to happen," because if you leave it up to a judge in the context of contempt, the judge is going to be limited in what they can do.
Leh Meriwether: The courts are limited by the language of the agreement, they can't insert new language.
Todd Orston: That's right. So look, for instance, for a house, saying you have six months to refinance, there's nothing unreasonable about that. But what happens if it doesn't happen? Well, all right, how about you have six months to refinance, if at that point it has not refinanced, possession and use of the home will transfer to the other party? How about, at that point, that party has the right to list it with a listing agent of their choice, set the listing price and potentially even keep any and all proceeds from the sale? You want to talk about lighting a fire under the other party to get it done by that date specific? That's the kind of thing you need to do.
Todd Orston: And there are other options, but the point is there are too many situations where the other party, that's in the house, they become complacent. And then, if you don't have the right language and you stand in front of a judge, and it's like, "They needed to refi," and the judge looks at the other party and goes, "Did you try and refi?" "Oh, yeah." "Well, okay, we're done here." I mean, at that point, the court's like, "Well, not in contempt. Show me some of your efforts." "Well, here's this application and this application and this application and my credit. I just can't do it." "Well, okay." Judge is going to be like, "My hands are tied, what am I supposed to do?" If you have the right language in there, then the court can start to enforce those additional terms.
Leh Meriwether: Right. I've literally had that happen before, where the person was given six months to refinance, and if they didn't, they had 30 days to put it on the market for sale. So the six months went by, he didn't even try, 30 days went by, not on the market. She sent an email saying, "Hey, you need to put this on the market for sale," he ignored her. We sent a very nice letter, "Put this on the market for sale," he ignored our letter. And the next letter, the next thing came from the sheriff's department knocking on his door. We had a hearing in front of the judge, and judge almost threw him in jail for not putting it on the market for sale. And so we said, "Judge, we want to get this thing sold. Can you do a compliance hearing in 30 days? And he's got 30 days to get [inaudible 00:42:20], and if we come back, if it's not on the market, throw him in jail."
Leh Meriwether: And the judge is like, "Sir, you're very lucky because I'm entitled. She wrote you, her lawyer wrote you, you ignored everything. I'm inclined to throwing you in jail right now." And so she gave him the speech and, "Oh, by the way, here's your attorney. How much do you want attorney's fees?" "1,500, Your Honor." "Sir, you've got to pay him 1,500 in 30 days. When we come back in 30 days, if you haven't paid it, you're going to jail." I mean, she was that strong with it. And it went on the market, it got sold, she got her money back. But if that language, that very tight language, had not been in the agreement, we wouldn't have been able to do that.
Todd Orston: An agreement is only as good as the terms in the agreement.
Leh Meriwether: Right.
Todd Orston: So if you don't put the right terms in, then you'll find yourself stuck. And I've had situations where a house is "On the market" for years, the other party is "Trying to sell the house for years," and the other party is sitting there with this on their credit, which is then affecting their ability to buy their own home and cars and whatever other things they want, that they need credit for, and they're like, "Well, what do I do?" And it's like, "Well, there's not much you can do because they have 15 applications they made to banks. Now, whether they really tried, they've submitted applications. So if we file a contempt, we're going to go in front of the judge, and they're going to say, 'I made an effort, I'm making an effort.' And at that point, the court may not be able to hold them in contempt, so it's going to come down to what additional terms you have in there."
Leh Meriwether: I'd leave this last because we only have a few seconds left. I'd leave this last thing, don't quit claim your interest in the house until the house is refinanced out of your name. And the reason is I had a case where the husband was killed in a car wreck, so he literally couldn't refinance it. But then, it went into a probate because there was no will and nobody was paying the mortgage, and so it was impacting her. But unfortunately, she had quit claimed it. Had she not quit claimed it, she would become the instant owner and could have put it on the market for sale. And unfortunately, we're out of time, everyone. Thanks so much for listening.