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In the past decade, Americans have racked up a prodigious amount of debt and it is fairly common for clients in divorce to not really understand how their debt is structured.  Was the U.S. Airways VISA joint or husbands with wife designated as an authorized user?  When trying to disentangle a couple’s financial relationship it is important for lawyers to know these things. Credit cards are also a fertile ground for fraud.  We have seen several instances where a spouse without access to his/her own credit, applied for a card or credit line on behalf of their mate without the inconvenience of telling him/her.  Of course, chances are excellent that you won’t have to pay for a credit fraudulently obtained on your behalf but that is often a laborious and complicated process.

Mortgages are complicated as well.  What laypersons call a “mortgage” is actually two legal documents.  When you borrow the money you sign a promissory note to repay it.  Then the lender asks you to sign a mortgage.  The mortgage is a pledge that the lender has dibs on your house if you default in paying the note.  What sometimes occurs is that one spouse has bad credit.  The lender will lend but only to the spouse with good credit.  Meanwhile, if the house is to be jointly titled, the lender wants both owners to promise that the lender has a secured interest in the house.  The “mortgage” is the instrument that provides that security.  So, if Wife has good credit and Husband has no credit or bad credit, the lender will have Wife only sign the note but both spouses sign the mortgage.  This means that Husband has no obligation to pay the note but if Wife fails to pay, the lender can foreclose on the house and Husband has no right to object.

If you are going through a divorce, order a credit report from Equifax, TransUnion or Experian. Federal law requires credit agencies to give you a free report once per year. It won’t reveal your credit score (that you will pay for) but it does show you what the credit information compilers think you have out there in the world of debt.  Study what you get and if things look wrong, it may be time to call the lawyer.  Note there are many subscription services that will monitor you for a fee.  That is a different animal than the report itself.

The Wall Street Journal recently ran an online and print article by Elizabeth Bernstein discussing a study which identified the five main reasons why people get divorced. The article and study look to divorced people to develop the common themes of their unsuccessful marriages.

While the article is designed to offer tips on how couples can stay together, I also found a few of the points instructive to individuals on surviving their divorce litigation:

 

Continue Reading Advice to Married Couples Works for Divorcing Couples, Too

This short memorandum will send any competent real estate lawyer into fits of hysteria. Lien law is some of the most complex real estate law one can encounter. But ordinary people bang into these kinds of problems every day and especially so when parties are separated from one another.

There are three ways to own property with another individual in Pennsylvania. Be careful at the outset, because you can also own property as a limited liability company (LLC) a partnership (either general or limited) or as a shareholder in a corporation. But where individuals hold property with others they usually do so in three ways:

                                Tenancy in common

                                Joint Tenancy with right of survivorship

                                Tenancy by the entireties

A tenancy in common means that our interests are completely divisible. If you and I own a bank account or a piece of real estate as tenants in common and one of my creditors gets a judgment against me, that creditor can seize my interest in the asset through proceedings to enforce the judgment. If we have a bank account with $1000 in it and we own it as tenants in common 80% me and 20% you, a judgment for taxes, child support, or any other kind of debt allows the creditor to seize my 80% interest to satisfy the judgment against me. He cannot get at your 20% interest but if we have a house together or we own a race car, the creditor can seize the asset, sell it to satisfy his lien and turn over to you 20% of the proceeds. Goodbye race car.

A joint tenancy is an estate planning device. We own the property together but if either one of us dies, the survivor gets the whole of the asset. We own the $100,000 race car we share. I die. You get it even though I put up $80,000 and you $20,000. Most tenants in common and joint tenants hold equal shares but they can make the percentages whatever they want. It is also not a device limited to two owners. A hundred people can own a joint interest in property if they want. Usually, that does not occur.

Now suppose the two of us own a race car and my ex-wife gets a judgment against me for failing to pay child support. She can take her judgment and use it so sever the joint tenancy just as she would with a tenancy in common. It just requires the extra step of breaking apart the joint tenancy. In the end, our race car is sold and she will get her judgment from the 80% of the proceeds that are mine.

Tenancy by the entireties is a joint tenancy between a husband and wife. No one else can qualify for this status. Unlike joint tenancy, the only person or entity that can break apart a tenancy by the entireties and sell the asset it owns is someone who has a judgment again both my wife and me. Let us say my current wife and I own the race car. I don’t pay my child support or my taxes. My ex-wife can’t get a judgment against my current wife. She does not owe child support. I do. So she might have a judgment for a million dollars. The law says she can’t get to our race car (new wife and me).

But suppose my current wife and I don’t pay our taxes. We file jointly but we just don’t send the money in. Now the tax authority has a claim against both of us because it is a joint obligation we both owe. They can get a judgment for what is owed and execute on the race car, because the debt, like the car is held as tenant by the entireties. If we filed our taxes separately, the answer is quite different. We don’t owe the taxes joint then, we owe them separately.

Husband and wife own a house. Usually they will have title as tenant by the entireties. Husband leaves wife and runs off to Las Vegas. He signs $100,000 worth of gambling markers and promptly loses all the money. Can the casino come after the house? No. That’s husband’s debt; Not joint debt even though the parties are not legally separated. Suppose wife get s angry at Mr. Gambler and buys a $25,000 ring on her American Express card. Can Amex get to the house? Again, no, unless the credit card is a joint card. Suppose the Amex card is a privilege card; meaning that Husband is the card holder and Wife is an authorized user. Curiously, no. Wife is not legally obligated to American Express unless she signed the agreement with American Express as well. So husband and wife could be back in the house; he with a gambling hangover and she with a beautiful new ring. But neither the casino nor the card issuer can force the sale of the home to get the debt paid.

A question we commonly are asked is whether one party can put the house in jeopardy by taking out a mortgage. The short answer is that where a home is owned as tenants by the entireties, it takes two to make the tango. No bank will issue a mortgage (which is to say lend money) on an entireties house unless BOTH parties sign the mortgage. So what if one party fraudulently signs the other parties name without his or her permission (known in the industry as a windshield signature). That’s not a valid mortgage and the risk ordinarily is taken by the lender. The lender has the duty to take precautions to insure that the signatures are legitimate.

Having fun yet? Here are a couple other wrinkles we see where clients have made trouble they failed to recognize. Many young couples these days like to buy their homes before tying the knot. If they close on the property before the wedding day, they CANNOT take title as tenants by the entireties. Reason: they are not married. And a subsequent marriage does not change the status of the ownership. So, when wife defaults on her student debt or her car loan, the creditor may be able to get to the house and force it to be sold.

A second extra credit problem we are seeing more of. Husband and wife are married. They want a house at the shore. Husband has bad credit. Wife has good credit. The lender does not want anything to do with husband. What they will do is make the loan to wife only.  She will sign the promissory note for $500,000. But they will make both husband and wife sign the mortgage if they want the property to be tenancy by the entireties.  Husband and wife own the property together.  But only she is on the note and can be sued for it.  Should she default, the lender will have the right to take a judgment against her in accordance with the note, but the mortgage says that it is collateral for the note even though husband is not on the note.  Husband does not owe the $500,000 but he pledges whatever interest he had in the shore home to the mortgage company. What we call mortgages are actually two separate transactions done at the same time.  Lenders who give you money make you sign a promissory note to pay it back.  That is itself an “unsecured transaction” because there is nothing to “secure” your promise to pay.  But if the lender demands collateral (such as a house, boat, car, aircraft) the mortgage is a document by which you pledge the asset in what is now a secured transaction (the object is the security).  You don’t need to be on the debt itself to pledge an asset.  If your no good brother in law borrows $50,000 from a bank, they may tell him he must get a guarantor who will pledge assets to secure the debt.  When your bride comes crying to you that her nieces and nephews will be on the street unless the two of you are willing to help, just remember it could be your house that gets sold when brother in law defaults.

          

Now wasn’t that fascinating.  Even we don’t think so.  But this is important stuff to know.

We have had support guidelines in Pennsylvania since 1984.  The effort was part of a federal initiative to see that all families with similar levels of income paid comparable child support. A few years ago the Supreme Court of Pennsylvania modified the rules to give recognition to the fact that home mortgages represented a disproportionate amount of household expenses by creating what is called a high mortgage adjustment. If the mortgage including taxes and insurance exceeds 25% of household income after spousal and child support are included, the Courts have discretion to take the “excess” and add 50% of that excess onto the support order. Here’s how it works:

Husband and wife separate.  Husband has net income of $15,000 a month.  Wife has net income of $5,000 a month. Under the guidelines 2 children are entitled to $2,877 per month.  If they live with Wife, Husband pays 75% of the $2,877.  If they live with Husband, Wife will pay 25% of the $2,877.  Either way, wife is also entitled to support.  To calculate that one takes Husband’s net, subtracts Wife’s net AND the child support.  The difference is them multiplied by .3 to calculate the spousal support component.  Arithmetically, if the children live primarily with their mother, the calculation is expressed;

{15,000 – (($5,000 + (2877 x .75))} x .3 = $2,353 in spousal support.

With the high mortgage adjustment one next looks to the total household income of the spouse in the marital home and multiplies it by 0.25 to determine what mortgage is reasonable. So Wife’s income is her own net of $5,000 is added to child support of $2,158 and spousal support of $2,353 to equal $9,511.  By definition a reasonable mortgage is 25% of that amount or $2,378.  Any excess over that amount may be divided equally with the spouse out of the house paying that amount as the high mortgage adjustment.  So if the mortgage with taxes and insurance is $3,378 per month, the $1,000 excess would result in an additional $500 in support contributions.

A good idea on its face.  But, alas, the mortgage world we live in today is a different place. Folks who net $20,000 when living in the same household usually make gross income of $25,000 or more.  Even before the mortgage crisis of the past two years, a family which when residing together had $25,000 of gross monthly income could qualify for a mortgage of $7,500 a month.  Under the current rule, a $7,500 mortgage would warrant an excess mortgage payment of $2,561. The “excess” contribution would actually be greater than the child or the spousal support.  The combined obligation on the payor would be $7,072.

This is not itself a horrendous burden but it ignores the difficulty of the situation. The adjustment does recognize how tenuous the situation is.  Wife will have net income of $12,572 before looking at the taxes due on her spousal support. But fully 60% of that income buys nothing more than the mortgage itself.  It leaves precious little to pay “all other” household expenses. 

This is written on September 17, 2008 the day of a 500 point drop in the Dow Jones Industrial Average and a little more than a week after two of the largest financial institutions in America entered government receivership. Two of our best established investment banks have disappeared and a little more than twelve months after the 2007 mortgage crisis came into focus, it is still not clear whether we are headed into the storm or the worst is behind us.

As attorneys we have little to offer by way of predictions. But it seems fairly clear that market price volatility will continue for the near term. This requires that saner heads to prevail and precautions should be taken to preserve wealth. Clients may be in the middle of separation or divorce. But even in war, there are common interests that need to be attended. Failure to do so threatens the financial health of both spouses with rare exceptions.

It is not unusual for modern couples to know very little about the investments they have made. Sadly, we are taught very little about modern finance and the recent events in world financial markets make it clear that even the experts can fall prey to what Allen Greenspan coined as “irrational exuberance.”
Whether you are in the process of marital dissolution or not, Rule 1 is to review what you own and understand the product. If you don’t understand the product, reach out to find out about it. It may seem embarrassing but unless you are willing to join the ranks of the hundreds of thousands of Americans who will lose their homes to variable rate mortgages or hedge fund investments they did not understand.

Rule 2 is to understand the importance of diversification. Seven years have passed since the collapse of this nation’s largest energy company. With Enron’s demise tens of thousands of employees saw most if not all of their life savings disappear because their entire investment pool including their retirement was entirely invested in one security. We still see clients who come to us with investment portfolios where 50% or more of family wealth is concentrated in one or two stocks; usually those of their employers or assets passed from generation to generation as a legacy. As recently as two years ago a portfolio of blue chip bank and automotive stocks would be considered the solid foundation of any portfolio. Today that portfolio could be said to have lost half or more of its value. Even traditionally risk adverse havens such as precious metals are experiencing stunning levels of volatility. In May of this year we wrote about gold prices of $1000 an ounce. Since reaching that high, they have declined by 30% in just a few weeks. Today, gold shot up 10% on the basis that the stock market was so hard hit. There is no single safe investment with the possible exception of US Treasuries or insured bank accounts.

It does not make sense on a long term basis to invest entirely in savings institutions and treasury offerings. The rates of return are often at or below the rate of inflation. But there is a fair distance between risk free investment and concentrated investment. The point is to be judicious and balanced in your investment planning.

Rule 3 is to actually pay some attention to what is in your portfolio, especially if is not professionally managed by mutual fund managers. Certainly, funds are not immune from losses or excessive expenses but they at least offer the benefit that “someone is watching” your investment pool on an hourly basis. Most of us have neither the time nor the inclination to manage these assets as they should be managed. There may be a temptation to avoid selling because the market is down. But, as noted above, we don’t know whether the market has bottomed or not. Many Bear Stearns shareholders could not stomach a sale of stock at half what they paid for it. Many of those same shareholders saw that half reduced to -0- in the weeks following their decision to defer selling. This does not endorse panic sales. But if dollar cost averaging is a smart way to build a portfolio, a similar routine is probably a smart way to unwind an investment.

If you are in the process of dissolving your marriage there is a Rule 4. Make certain that any agreement you have to divide investments takes into consideration the investment experience of what you are dividing. Even if you had invested in a broad based index fund if your investment was $500,000 and you were equally dividing it by an agreement made in May, 2008, that division could be considerably less today. If I held the fund in May and promised to pay my spouse $250,000, the risk of the loss fell entirely to me. This can be especially important with ERISA based retirement assets for while most such plans move money relatively quickly retirement plans have a statutory right to take as long as eighteen months to approve the instruments which allow the asset to be transferred on a tax deferred basis.

If you are selling appreciated assets (where there have been gains) it may make sense to sell them jointly and share the tax consequence. If I sell an asset which has appreciated by $200,000 so that I can make a lump sum payment to my spouse of $200,000, I will be paying the tax on the gain. If I transfer the asset into joint title, we will each share half the tax burden upon sale.
Once again, attorneys should not be relied upon to choose investments. Our training has nothing to do with that field of endeavor. But while we lack the wisdom to decide what to buy experience has taught us that clients tend to not fully understand their holdings or to so concentrate them as to create rather than minimize risk. In markets as volatile as those we have experience in the past twelve months, prudence dictates that all of us need to better understand and evaluate those things we have assembled in our portfolio of investments.