Dividing Assets in a Divorce: Complicating Factors

This is part three of a four-part series

Click for part one and part two.

Three significant hurdles to negotiating a divorce settlement involve mortgages, consumer debt, and retirement assets. There are more scenarios under each of these categories than I could possibly explain in a blog post, but I will attempt to explain why these assets (or lack thereof in the case of consumer debt or an underwater mortgage) complicate matters for divorcing parties.

After housing prices peaked in 2006, many folks were left with mortgage balances that are much greater than the fair market value of their marital residence. Problems associated with “underwater mortgages” are inevitably aggravated by a divorce. For example, the husband may want to allow the home to go into foreclosure, but the wife may want to remain in the home for the foreseeable future. Even if the wife can afford the mortgage payment on her own, she may not be able to qualify to refinance the mortgage. This scenario creates additional complications. The parties will need to come to some type of agreement about how long the husband is willing to remain on the mortgage. Who then claims the mortgage interest deduction if the husband remains on the mortgage? What do the parties do if the wife is unable to refinance the home?

If the parties have a substantial amount of consumer debt, they may need to consider filing for bankruptcy. A bankruptcy will impose a stay on all pending litigation (basically, it “freezes” a pending divorce action) until the conclusion of the bankruptcy. If bankruptcy is not appropriate, the parties must agree on how they would like to divide their credit card balances.

Retirement assets complicate the equitable division of the parties’ assets as well. If a portion of one party’s retirement accounts is premarital, he or she must also be able to show what the balance was at the time he or she married. Once premarital contributions are taken out, the party with the greater proportion of retirement assets may need to transfer part of his or her IRA, 401(k), or pension to the other party. Transferring these assets may also trigger tax liabilities for an early withdrawal if the parties do not follow the proper procedures.

In these types of cases, attorneys must carefully craft settlement agreements to protect their clients (the subject of Part Four in this series). Please check back next week for the conclusion of the Dividing Assets in a Divorce series.

Please contact my law office for information specific to your case. The above is for general information purposes only.