Debt and Divorce in New Jersey
How is credit card debt distributed in a divorce action?
There are a couple of different schools of thought about what we do with credit card debt. Generally speaking, debt is the opposite of assets, so most judges are going to look at credit card debt as something that should be distributed equally between the parties, assuming that it was incurred during the marriage for a marital purpose.
The exception to that is when you are typically incurring credit card debt for living expenses. When it becomes a part of your lifestyle, most judges would say that it’s unfair to have the party who earned less of the income be responsible for half of that debt, even though they only contribute 20% or 30% of the household income to the pay down of debt. We often have to look at how the expenses were incurred, when they were incurred, and for what purpose. As a general rule, think of it as a debt that’s the opposite of an asset. We’re going to normally look at it to be equal, but if we have a situation where one party has to use the credit card debt to pay expenses because the other was not paying their share of support for the household, then we look at a disproportionate distribution. That could be 70/30, 80/20, depending on the means of the parties.
How is marital debt typically divided in New Jersey? Does the person responsible for incurring the debt have to pay it?
Marital debt is debt that was incurred from the beginning of the marriage to the filing of complaint for divorce. Generally speaking, if it was debt that was incurred to benefit both parties, it’s going to be divided equally between them at the time that it’s to be repaid in the divorce process. In terms of how we look at who’s responsible for debt, it normally does not matter that debt was incurred in the name of one party versus the other. What is important about the debt is for what purpose that debt was incurred. If one party went out and typically did the household shopping, that party is not going be responsible for the lion’s share of the debt simply because he or she may have been the one in whose name the debt was taken.
We’re going to look at was the debt incurred for the marriage or was it incurred for an individual purpose. Individual purpose could be something selfish, like an affair or it could even be something that is not necessarily a benefit to the marriage, but it wasn’t the expectation that it was a part of the marital lifestyle. For instance, you have one party that goes through a mid-life crisis and decides to go out and buy a new sports car and incurs a substantial debt in order to do so. The party who objected to that expense or perhaps the party who didn’t get to use the vehicle that was purchased might say, “You know that really did not benefit our marriage. That just reduced our total asset wealth, so I’m going to walk away with less wealth as a result of this person, my spouse, incurring this debt. They should be responsible for the debt because I’m not going to get to keep the asset when we separate.” Those are situations where you might see an allocation of debt to a party who incurred it. But normally speaking, all debts that are incurred are going to be the responsibility of both parties, no matter whose name is on it.
What is considered non-marital debt and how is that distributed in a divorce?
Generally speaking, debt is distributable between the parties when it is incurred for a marital purpose. Non-marital debt is debt that is incurred either prior to the marriage or for some purpose that has no benefit to the marriage, such as one party incurring debt for an affair, or a party incurring debt for some lawful purpose that really had no benefit to the marriage, such as a gambling debt. There could be any number of reasons where one party would be incurring debt for their personal use but not for the marital use. In those circumstances, the debt is distributed. Typically, it’s first allocated to the person who incurred the debt, but it then would be distributed based on a standard of equity as opposed to looking at it as the entire marriage responsibility. That could be that it’s disproportionately shared. If one person got a greater benefit out of the debt, they may be responsible for a higher share of the pay down. If it was solely for selfish purposes, such as gambling debt or an affair, it’s then again the responsibility of the person who incurred the debt.
What happens if a party incurs additional debt after the complaint for divorce has been filed but before the divorce is finalized?
In New Jersey, the marital period is from the filing of the marriage certificate to the filing of complaint for divorce. Anything that happens after the filing of complaint for divorce is typically allocated to that person who incurred the debt or incurred the expenses after the filing of the complaint. The usual exception to that is when parties will physically separate and as a result, there’s a shortfall of money to be able to meet the household budget. If one party moves out and does not pay support into the household, or even if they do pay support but that support is not adequate, normally a court will say that any credit card debt incurred by the person left behind who is still trying to float the household and maintain the house for distribution upon divorce, that person shouldn’t be taxed with all of the debt that they incurred. Sometimes it’s shared disproportionately because they got more of a benefit. And sometimes it’s shared 50/50 because it was a joint responsibility to maintain the expenses for the family.
If debt was incurred before the marriage, is the party who did not incur the debt obligated to pay it back?
As a general rule, the period of time that the parties are going to both be responsible for debt is from the beginning of the marriage, the commencement date, to the filing of complaint. Anything that is before the filing of the marriage certificate or after the filing of the complaint for divorce is the responsibility presumptively of the party who incurred that debt. The exception to that for anything before the marriage, however, is when we have debt that was incurred in contemplation of marriage. It’s not uncommon that parties will start to set up their life together economically before they actually get married. That can be that they purchased joint real estate or perhaps they incur debt to furnish a household or to buy expenses for the new life that they’re creating together. In those circumstances, the court will oftentimes look at how the parties were spending their money prior to the marriage starting.
If there was a disproportionate share of income on one side or the other, the court could disproportionately allocate that premarital debt. If it was that both parties got the mutual benefit of the assets that were purchased that led to that debt, the court could say you’re both responsible for it, 50/50. It really is a fact-sensitive analysis, but the general presumption is that if it was incurred before the marriage, it’s going to be the responsibility of the person in whose name that debt was taken.
What happens if the parties cannot afford to pay off their marital debt after paying legal fees and other divorce-related obligations?
It’s not at all uncommon that divorce does cause economic strain for a family. There are times when parties cannot afford to pay their debt after they’ve paid all of the other divorce-related expenses. When that happens, we do a lot of things to try to negotiate the debt and try to either reduce the debt or establish a payment plan that is consistent with the means of the parties after they have now separated and gone forward with their life after divorce. One common device that we use is called an “accord in satisfaction.” That’s where we would contact the company who holds the debt, oftentimes a credit card company, and we would ask them to accept pennies on the dollar of the total amount that’s due in consideration of the fact that the parties are simply not going to be able to pay the debt otherwise.
When that does happen, there are a couple of consequences that we have to make sure that people are aware of. First, whenever you compromise your debt down, the IRS for purposes of the Internal Revenue Code will impute to you income consistent with the debt that you wrote off. You’re going to owe taxes on the amount that you saved by virtue of reducing your total debt.
The second consideration is the fact that when you do an accord in satisfaction for one party’s debt but you don’t do it for the other party’s debt, maybe you decided that for whatever reason one spouse had higher interest rates on their credit cards than the other spouse, you might decide to write off the debt of the spouse that has the highest interest rate. But both parties are then going to be responsible for the remaining debt. Now that can put you in a precarious situation because if both parties are not invested in making sure that the debt is paid off, then the person whose left with more of the credit card debt upon dissolution of the marriage could be held responsible for it if there’s a default by their spouse in paying their fair share.
The best-case scenario is always to take care of the debt from any assets that you have and for any income that you have before the divorce is actually put through.
When a high-net-worth business owner is preparing for divorce, do they ever run up the company’s debts or losses to decrease the company’s value?
It’s very common that business owners will be in a status where they can be very flexible with how they represent their income, their assets, and their liabilities in their business. It’s not uncommon that the spouse who is not the working spouse, not the business owner spouse, will become suspicious that the business owner spouse is playing games with the numbers for purposes of reducing income. When you start to have that suspicion, there are many different ways of looking at that. The first thing we always want to know is whether or not there’s been any change in the accounting practices of the business in the recent times around the filing of complaint for divorce. But you want to look at things such as profit and loss statements of the business. Maybe you look at the balance sheet and you can also look at the income statement, so that you have a sense of whether or not the way the income and assets and liabilities have typically been characterized on these documents have suddenly changed.
If you start to see a change in the way that income information is reflected on the economic data points of the business, there may be some cause for concern. It’s much more difficult to manufacture or manipulate the income status of the business when things are held in a proper accounting format. It becomes a lot easier when you’re talking about a solo or very small shop where you have paper records or where you have a business owner who may not actually employ a bookkeeping service or accounting service to keep their records. In those situations, you will often have cash income that suddenly becomes available only in income statements when there’s going to be some use of that money right away. If the money’s not going to be used for any business purpose, miraculously the business doesn’t have any cash income, which the non-owner spouse can oftentimes recognize as ruse in order to reduce the total amount of income that the person has available.
Can a divorcing person create false debts to decrease the amount of support or marital property?
It’s not the common situation where you will see debts be manufactured, except in situations where people will suddenly create promissory notes with their relatives. That’s one thing that divorce attorneys always like to advise their clients, that if they’re going to be taking out debt from a friend or family member with the expectation that the debt be repaid, they definitely want to make sure that there is some note to memorialize the fact that the money was taken and that there’s the expectation of payment, and that that payment is expected in some specified time.
If that type of promissory note shows up in the divorce, in situations where you normally wouldn’t expect it to happen, we might think that that’s a false debt. For instance, during the marriage the in-laws of the wife, the husband’s parents, were typically lending money to the family in large quantities without any expectation of repayment, maybe they were gifted or maybe the loans were simply forgiven after a period of time, but there was never any money that exchanged hands to repay those debts. That might have been what was going on during the marriage. But then miraculously, as soon as one party filed the complaint for divorce, the father’s parents suddenly decide that they want to have explicit terms as to the dates of repayment and they want to have repayment made 50/50 by the parties in such a way that they can extinguish the debt.
When you start to see that type of gamesmanship, if you will, a requirement that debts be repaid in a way they never have been in the past, we will often claim that that is a false debt. Presumptively the note is valid, but we can always seek to rebut the presumption that it’s valid by taking testimony and looking at other facts and circumstances.
Why is it important to pay off joint debts before divorce?
It’s important that you take care of joint debts before divorce for a lot of reasons. The first thing is that when you are divorcing, you’re going to have a different amount of debt available to you to meet your expenses or for your spending, and as a result, your credit score is going to change even when there’s not an adverse situation in divorce, which is rare because most people are living at or above their means. Most people do not have enough of a reserve not to have any debt. But when you look at what happens in divorce, your economic situation changes and oftentimes that has a negative impact on your credit score. You want to be able to extinguish old debt and get that taken care of so that you can start to rebuild your credit history. If you don’t pay off the debts in divorce, that becomes harder and it usually takes longer than it otherwise would have.
The second issue is that if one spouse post-divorce has a change in their economic status, and they decide to perhaps file for bankruptcy, they’re going to be able to extinguish their debt whereas you’re going to continue to have a contractual obligation with the third-party debtor to maintain your debt. Now that doesn’t mean that your spouse might not be responsible for their share. You would potentially have an indemnity agreement where they have to share with you the expenses of your debt and pay either to the debtor, the creditor, or to you the amount that they are responsible for.
Ultimately, it really isn’t fair if their debt goes away and you’re still nursing your debt, so you want to make sure that the terms of your agreement specify who is going to have what debt post-divorce so that if there’s a change, that might be a change in circumstances where you would go back to court and ask for a reallocation of those debts. Of course, no one wants to go back to court. That is time-consuming and expensive. You really want to wrap those things up before you get divorced.