Debt & Divorce
People Fight About Two Things in Divorce: Kids and Money.
People fight over these things because their ultra-important. Nothing is more important than ensuring children are taken care of in a healthy, nurturing environment where they can grow up and be successful.
And to create such an environment, you need money. You need money for a good home, money for healthy food, money for education, and on. So, money and kids are intertwined. You can’t deal with one and not the other.
Debt and Divorce FAQs
Utah is an equitable division of the assets and debts state. Equitable means fair. Fair has been interpreted by the Utah courts to mean equal, unless there is a good reason it shouldn’t mean equal.
So, the general rule is all debts and assets will be split evenly between husband and wife.
For example, if a couple owns a home, sells it as part of the divorce, and pockets a total of $100,000 in equity (after paying realtor fees, etc.), they will each receive $50,000.
Likewise, if a couple has $20,000 in credit card debt, they generally will each have to pay $10,000. (For the most part, it doesn’t matter who actually bought purchased stuff with the card, just that it was bought when you were together during the marriage.)
Post-Separation Debts and Assets
So, what happens if people have been separated for a while and they incur debt or accumulate assets?
If someone incurs debt, that debt will usually be theirs 100%. The logic is you can’t separate from a spouse, run up massive debt on your stuff, then make your spouse pay for it. (A common exception to this is if the debt was incurred to maintain marital property, like the home, or to pay for children’s necessities.)
Now, if marital property increases in value after separation, both parties will usually share that increase equally. For example, if the marital home goes up in value after separation but before you sell it, everyone will get their equal share of that increase.
And what if you win the lottery or get a huge raise at work after you separate? Honestly, that will depend on a lot of factors, like the total time of separation. In fact, there are way too many factors to list here. If you have a situation like this, let’s talk about it.
Women, in particular, often worry about what the future will bring after the divorce is finalized. There are many reasons for this, including the fact that some women did not work while they were married. As a result, they know that their life is going to change in many ways.
Important moves to make
Preparing for divorce is easier said than done, but there are basic steps any woman can take to make herself feel better about the future.
- Gather all the necessary financial records. From bank account statements to retirement account statements, don’t leave any stone unturned.
- Save for the future. Even if it’s only a little bit of money, it will come in handy as you move through the divorce process. You can use the cash for legal fees, starting your new life, and giving yourself some “padding” if you happen to run into a difficult month.
- Get a copy of your credit report. This will give you a clear idea of where things stand with regard to your credit, including areas of concern that require your immediate attention.
- Make important changes. Do you need to alter your estate plan? Do you need to name a new beneficiary on your life insurance policy? These types of important changes need to be made right away, as any delay could have a far-reaching impact in the future.
With so much going on, it can be a challenge to focus your time and energy on these financial moves. Even so, you need to make sure that all of these points are high on your priority list.
When you take the right steps to financially prepare for divorce, when you understand your legal rights, and when you have the right people on your side, it’s much easier to get down to business and put your divorce in the past. From there, you can look forward to a future in which you are able to live a better life.
When we meet with people and start walking with them through their divorce, there are a lot of questions about money. This makes sense because people are scared about their futures, and money and debt is a big unknown when looking in to the future while going through divorce.
One of the most common questions we are asked is: “What counts as debt?”
The answer is simple: anything you have, or services you’ve received in the past, that you owe money on is debt.
Now, just because you make monthly payments on things doesn’t mean those are debts that need to be divided during divorce. Here are a few examples of what I mean:
- Utilities: You make monthly payments on utilities, but you don’t own utilities, so they’re not debt that we would split in divorce. Utilities are part of your monthly household budget, but they aren’t marital debts.
- Daycare: You pay your daycare provider every month, but those are, almost always, for the next month’s services, so they aren’t marital debt. (Note: if you owe six months of back daycare expenses, that would be marital debt we would need to divide.)
- Health insurance: you pay monthly health insurance premiums, and that’s an ongoing expense that’s part of the household budget, not a debt for past services.
Now, let’s contrast this with examples of things that are debt which would be discussed and negotiated during divorce:
- Medical bills: While monthly insurance premiums aren’t debt, medical bills certainly are. You’ve received services and you owe, so it’s a debt. Medical debts are almost universally marital (as opposed to personal) debt.
- Homes with unpaid mortgages: Most people think of homes as assets. In divorce, that’s only true if the house is paid off. If you are still making payments on the mortgage, then the home is a debt. It’s only after you sell it and make money on the sale, that it’s positive equity becomes an asset.
- 401(k) loans: Usually, a 401(k) is an asset that we would divide in divorce. Often, though, people take out loans on their 401(k)s for whatever reason. If that’s the situation, then the 401(k) principle would be an asset, but it would be offset by the loan, which is a marital debt that needs to be divided. So, if you have $50,000 in a 401(k), and you have a $15,000 loan on it, then there’s $35,000 in assets and $15,000 in debt on the 401(k).
Conclusion
How debt is divided in divorce depends on your particular financial situation. That said, you know something is debt that will need to be divided in divorce if it’s anything you have, or services you’ve received in the past, that you owe money.
One of the most common debts couples have to divide in divorce is medical bills. Medical insurance is expensive, and medical bills, even if you have insurance, can break the bank. Because this type of debt is so common, we often have people ask us something like this: is medical debt incurred for one spouse a marital debt that will be split in divorce?
To answer this question, we first have to see what Utah law says about marital debt. Utah Code, Section 30-2-9 reads:
| (1) | The expenses of the family and the education of the children are chargeable upon the property of both spouses or of either of them separately, for which expenses they may be sued jointly or separately. . . . . |
| (4) | For the purposes of this section, family expenses are considered expenses incurred that benefit and promote the family unit. Items purchased pursuant to a written contract or agreement during the marriage that do not relate to family expenses are not covered by this section. |
So, family expenses are joint (i.e., 50/50) expenses, and family expenses are those incurred to “benefit and promote the family unit.” It’s hard to imagine how most medical treatment wouldn’t fall under benefitting and promoting the family.
The Utah Supreme Court has talked about this very question, and has said: “It is well established that the costs of . . . medical services . . . are family expenses for which both spouses are liable.” Outsource Receivables Mgmt. v. Bishop, 2015 UT App 41, ¶ 4, 344 P.3d 1167, (quoting N.A.R., Inc. v. Elmer, 2006 UT App 293, ¶ 4 n.2, 141 P.3d 606).
So, yes, without much doubt, medical expenses are marital debt. Now, in the law there are exceptions to every rule, and here it is no different.
Think about a situation in which a spouse has an affair, contracts an S.T.D., and needs medical treatment. That cheated-on spouse will almost certainly not be on the hook for the cheater’s treatment.
So, while there are some limited exceptions, the rule is medical treatment will be divided evenly between people getting divorced in Utah.
Dividing assets and debts is usually a pretty straightforward process. (You can read about the basics here and here.) So, you usually don’t fight about that a ton.
Child support is also pretty straightforward and unobjectionable. I mean, honestly, who fights against paying to help their kids? (You can read more about how child support is calculated here and here.)
Same goes for child-care costs and sharing insurance and out-of-pocket medical expenses for your kids. They just aren’t that controversial, so people tend not to fight about them much.
And then there’s alimony. This is where it can get contentious. No one likes to pay alimony. Men don’t like to pay it because they feel like they’re paying their ex-wife to be their ex-wife. And, if men don’t like to pay alimony, women like to pay it even less. (Women paying men alimony is pretty rare, by the way.)
The reality is, though, that alimony is a regular part of divorce. What I mean is it’s pretty common that one party pays another party alimony for a while. (For a primer on alimony calculations, read here.)
Alimony and Mortgages
Because alimony is a regular part of divorce, and because people usually buy homes after divorce (you should wait a little while before buying a home), we get asked pretty often if and how alimony affects buying a home.
There are two angles to this question.
First angle is from the point of view of the person paying alimony.
If you pay alimony, you almost always pay it every month for a period of time (e.g., every month for five years). This means you have a monthly debt obligation that must be paid before paying a mortgage. This increases your debt load when you apply for a mortgage, which means you’ll qualify for a lower loan amount or a higher interest rate.
You can still qualify for a mortgage if you pay alimony, but it will be at a decreased amount or higher cost.
Second angle is from the point of view of the person receiving alimony.
If you receive alimony, that monthly amount will be counted as income when you go apply for a mortgage loan. (It’s also considered income for tax purposes.) This means your alimony will help you qualify for a higher loan amount or lower interest rate.
Ultimately, how alimony affects particular mortgage loan amounts and interest rates is dependent on the company you choose to finance your mortgage. Shop around.
Child support is the intersection of those two things. So, as you would expect, there are some fights about child support in many Utah divorces.
Sometimes, to lessen the fight, people will try to agree to waive (i.e., not collect) child support.
But, can you actually do this? Can you just waive child support?
The answer is a pretty resounding “no.” The reason for this is child support doesn’t belong to you or your spouse. Child support belongs to your kid(s), so you can’t bargain it away.
Judges guard child support very jealously. This means if you try to agree in divorce papers to not collect child support, your judge will not accept the agreement and will not finalize your divorce.
(I know this because I tried it a few times. Every time, the judges would send back the agreements and tell me to rework the agreement to include child support.)
What all this means is you have to include child support in a Utah divorce agreement. There’s simply no way around that.
Possible Solution
Now, a possible solution is this: you could have a gentlemen’s agreement that, even though child support is in the divorce decree, that the person owed child support will not collect it.
You really need a lot of trust in a situation like this because the person owed child support can turn around at any moment and go collect all the child support you haven’t paid. If you don’t have complete confidence you both will abide by the gentlemen’s agreement, don’ do it.
Honestly, this is the best solution I’ve found to address this problem. It’s far from perfect, but it’s really the best you got.
And for most people that’s true. It’s where, unfortunately in my opinion, we keep most of our wealth. (Don’t get me wrong, home equity is great, but it should be only one part of a person’s overall wealth, not the majority of it.)
But what about divorce? Is a marital home as asset (i.e., a positive) in divorce, or a debt (i.e., a negative)?
The answers to these questions depends on the home. In fact, there are three primary answers to these questions:
- If your home is paid off, it is anasset. This is because you don’t owe anything, so the entire value of the home is yours.
- If you still owe on your home and don’t have any equity, your home is adebt. In other words, if you’re upside down, you’re in in deep.
- If you still owe on your home and have positive equity, your home isa debt and an asset. Since you owe on your home, it’s be definition a debt. However, since you have positive equity in the home, and you would make money if you were to sell it, your home is also an asset.
As an example, say you owe $100,000 on your home. You could sell the home for $200,000. So, it’s a $100,000 debt that needs to be addressed in divorce, but it’s also a $100,000 (less costs and fees associated with selling the home) asset that needs to be divided in divorce.
What’s Normal in Divorce
Usually, people who own homes haven’t paid them off (on average, people live in a home for seven years before buying a new home), but they have positive equity. So, most people going through divorce have to deal with their home as an asset and as a debt.
P.S.: This post was meant to be a simple explanation about how to think about a home in divorce. For more on how we usually deal with homes in divorce, read here.
When you divorce, you almost always split medical costs. (For more on how this works, read here.)
That seems pretty easy, right? Usually, yes, but, as with everything in divorce, there are complications. And for whatever reason, braces are one of those complications.
I can’t tell you how many times we’ve had a client call us and say, “My son/daughter needs braces, but [enter soon-to-be ex’s/ex’s name here] said he won’t pay for it.” The reason is almost always that braces aren’t necessary. (This, of course, makes no sense. No one gets kids $4000 braces for non-essential reasons.)
Here’s how we tell our clients to deal with this situation (it’s worked every time we’ve had to go to court, so it has a pretty good track record):
Go to your orthodontist and get a letter stating the braces are medically necessary. Every orthodontist on earth will give you that letter, so it shouldn’t be a difficult task.
Once you get the letter, give it to your soon-to-be-ex/ex. They almost always start paying their half at this point.
Sometimes, a parent will say orthodontia is not a medical expense and refuse to pay. This kind of makes sense, but every time we’ve encountered it in court, judges and commissioners reject it.
Last Piece of Advice
If you know you’re going to get resistance on the braces, go get the letter right up front. That should help minimize conflict.
Schedule a time to talk with us – we are here to help you. When you meet with your divorce lawyer, we will go over your entire case, your children, your money and everything else that’s important to you. Our goal is to remove the fear associated with divorce by protecting your money and maximizing your time with your kids, all within 3-6 months. We look forward to meeting with you!