Reader Question: Is a Financially Clean Divorce Possible?

by Kevin on September 2, 2009

A reader wrote in with this question:

I know someone going through a tough time right now.  They were married less than 2 years ago and have decided to get a divorce.
There was no prenuptial agreement.  They bought a duplex right before the marriage.  As far as I know, both of their names are on the mortgage(s).
Yep, that’s plural.  They have an 80/20 two mortgages thing going.   They did deposit $11,500 on the house, which was a gift from the wife’s parents.
The wife also paid off the husbands car and motorcycle loans prior to moving in.

The husband has expressed an interested in keeping the house.  The house (you guessed it!) is now worth a lot less than what they owe for the mortgage.  The wife is interested in walking away, letting the husband keep the house or whatever he decides to do with it.  Right now she is just trying to figure out how to remove her name from the mortgage if at all possible.

Obviously these two people need lawyers.

The husband also offered to “let her walk away” from the obligation of paying the mortgage on the house if he could keep their savings (around $6000) and keep the engagement ring (worth at least $5000).   Hopefully the wife will listen to everyone around her, and not accept this “deal”.

From a financial standpoint, what kind of advice would you give to these two individuals?  They are currently still pooling all of their money into a joint account and continue to pay all the bills equally.  This includes house stuff, mortgage, the husbands student loans etc.

We think the wife and husband need to start splitting their money back into private accounts and split the bills 50/50 until a court orders something different.

My friend cannot be the only person going through a divorce whose house is now worth less than the mortgage, I wonder how other couples are dealing with this kind of issue.

Let me start by saying that this is definitely not an area of expertise for me. I’m not a divorce lawyer. I’m not familar with how divorces typically work, how things are split up, etc.

Additionally I would tell them to seek counseling. It is none of my business, but divorce is costly and in my opinion very sad. In strictly a financial sense a renewed marriage would likely be much cheaper! I would highly recommend they watch the fantastic movie Fireproof or perhaps read the book The Love Dare.

I have also heard that an uncontested divorce (where both parties agree they no longer want to be married) is much less expensive than a contested divorce. This makes sense — if someone wants to divorce you and take half of your stuff, and you don’t want to get divorced… you are going to fight it. And fighting gets expensive.

Two Individuals in One House

Aside from that I would agree they should start living as individuals again. Her income is her income. His income is his income. Splitting the shared bills seems reasonable as well. I would caution on the bills though — if there is something she cannot live without that has a monthly payment, but he has no use for it, she should pay for it on her own. The same would apply to his hobbies as well.

For example if she is in a book club that is $10 per month and he is in a car club that is $30 per month… they should take care of those costs on their own. I would also imagine this would cause some fights, but to me it makes sense to only split things you both get equal value from — utility bills for the home, the mortgage payment, etc.

Of course when you do this there will inevitably be someone who makes less who is likely to be impacted more. (That’s why staying married makes great financial sense.)

The House Issue

In regards to the duplex I honestly have no idea. Should he be allowed to keep their savings and her ring? Should she allow him to assume the full debt of the mortgage?

A part of me thinks it makes sense that if the value of the home has dropped $22,000 or more then that seems like a fair trade. She is essentially paying off her half of the reduced value of the home.

It could be argued that she, through her family’s generosity, paid the down payment plus paid off some of his debts. So to ask her to sacrifice the $11,000 in savings and ring would be putting all of the financial cost on her.

At the same time those things are sunk costs. You can’t get the down payment back now.

I’m Stumped

On only my second reader question I’m stumped. I honestly don’t know what to say here. Divorce is not my area of expertise and the devalued duplex definitely throws some complexity into the issue.

What do other readers think? What should this couple do?

{ 10 comments }

The Financial Blogger September 2, 2009 at 7:24 am

Pretty tough situation indeed!

As a certified financial planner, here are my thoughts (please keep in mind that those are not financial advices.. they need to meet with a professional and explain their situation in person):

The first step is to separate everything on paper:

Budget:
– Write down all common expenses (utility bills, mortgage payments, food, etc).
– Open separate accounts and keep the joint account to pay off common expenses. Deposit their pay checks in their personal account.
– Divided the common expense in 2 and each party must deposit this amount of money in the joint account.
– All other expenses should be assumed by the person who spends the money (i.e. the husband student loan should be paid by him only).

Balance sheet
– write down all assets (savings, duplex, etc) with fair market value.
– write down all common debts.

Split what is left:
– depending on the situation, it may be a fair deal (or not) to have the husband keeping the devalued duplex along with the savings and engagement ring. This matter should be discuss in order to find a fair deal for everyone in term of $.

Another solution would be to both live in the duplex (1 apartment each) until
the duplex gain back its original value.

As for the original cash down, if it was not stipulated that it was part of her Estate, she can’t do much about it…

hope it helps!

Matt Jabs September 2, 2009 at 11:40 am

Oh man. My heart goes out to people who do not take their vow of “till death do us part” gravely serious. Sure things happen that challenge a relationship, but our commitment to our spouses was a vow we made before God, our families, and our friends… and that promise needs to be followed through on – for better or for worse, in sickness and in health.

When we die we cannot take anything with us, and one of the only things we have left is our word. It is very important that we keep our word.

I hold the position that people should live up to the consequences of their decisions. If they decide to dissolve their marriage… what God joined together will NOT be easily separated by man. When man tries to dissolve these unions they are almost never pretty and almost never easy because they simply were not designed to be torn asunder.

I know this does not specifically address the post at hand, but I considered it worth mentioning.

Cat September 4, 2009 at 1:53 pm

If I were her, I would see it like this: the down payment’s sunk, and the house isn’t worth enough. I would agree to his deal but only AFTER she had documentation that he had refinanced the loan solely in his name. I see it this way because this is the way a judge will see this-
Both their names are on the title
Both their names are on the loans
The property should be sold and any profit/loss split 50/50.

In my experience (wish I didn’t have any) the court doesn’t care who paid what previously. All that matters is what assets exist now to be divided. And if the mortgage isn’t getting paid, the mortgage company doesn’t care who does what. They’re going to come after both names on the loan unless that loan is paid and the condo is refinanced under a single name.

Divorce isn’t fair, especially financially. If you’re set on going through with it, take what you can get. Otherwise you wait 6 months for a court date and still have to pay joint expenses in the meantime (even if the other person stops, because it’s your credit on the line). And as PP said, I would immediately get separate checking and contribute equally to joint expenses, keeping any extra and paying personal expenses personally.

And @Matt- sometimes it’s a get-out-or-get-killed situation. I made the decision to divorce. Doing so probably saved my life. In my case, I decided that I had lived up to my end of the bargain, because the death that parts you shouldn’t be caused by the other person. That’s one consequence too far. Every situation is different, and I’m sure your comment was meant more toward this couple, but I hate assumptions about divorce. I love your blog (your laundry detergent is my hero!) and I’m sure you’re a great guy, but divorce is a terrible, terrible thing to go through, and I hate being lumped in with people who just “gave up.”

Matt Jabs September 5, 2009 at 11:46 am

Hey Cat:

Yeah, my comment is not addressed to people who are in life and death situations… but to those who view marriage as just another whim to try out for a few years then toss to the curb.

Of course… there are always exceptions but I think you know the type I’m speaking of. If you have a clean conscience before God then you are not in that group, and should feel no guilt, shame, remorse, or what have you. 🙂

Still, my heart goes out to you because like you said… divorce is a terrible thing that we are not meant to go through, and so I too always hate to see anyone have to go through it.

FB @ FabulouslyBroke.com September 2, 2009 at 12:19 pm

That is a sad situation.

My initial thoughts:

Her parents gave the money for the home. $11,500. Assuming she isn’t going to fight for all of it, she should get that half back from him, regardless because he never put in his 50%

I also HEARTILY agree that she should NOT take that “deal”.. what a load of crock that is.

She also paid his car and bike loans (what a sweetheart), and that should be taken into consideration because they didn’t have prenups and she thought they’d be together forever. Maybe ask for that amount back? Or work it out somehow in getting the key pieces of furniture she wants to keep as a repayment? I don’t know.

Or maybe she gets to keep the engagement ring as payment for clearing HIS loans that were in HIS name?? Trying to think of something here that’s fair.

If not, the engagement ring belongs to him. Period. He bought it for her as a commitment, they don’t have one any longer, and he should have it back as his property if he doesn’t give it to her to zero out the loans she paid for him.

She should DEFINITELY get half of the savings at $3000…

As for the house.. I’d get my money back from the down payment, at least 50% of it (assuming the other half was gifted to him by her parents.. ), and I’d tell them to sell it, even if it’s worth less than the mortgage.

OR, he buys out her half. If the house is worth $200k, he “buys” out her half with some agreed amount that is reasonable to both parties, since he is probably keeping all the furniture too and she wants a clean start.

What a headache. My heart goes out to them.

And this is exactly the reason why I make sure everything is 50/50 with BF and I. Even for buying a home, I’d put the 50% downpayment down and 50% on everything else. If not, it just gets tricky with who paid what, who ponied up what cash for what down payment, how many years ago….

Annoying.

FB @ FabulouslyBroke.com September 2, 2009 at 12:21 pm

Thinking about it more, she should just take the 50% of the equity out of the home as her bought out half (he should pay her), and get half of the down payment back, as well as half of the value of the furniture (or to keep key pieces she wants that is equal to 50% of what they bought together).

Then she just gets out of it completely, in a fair trade.

Michelle September 2, 2009 at 1:42 pm

Personally, I don’t believe it’s fair to ask for anything back that you gave to someone during a marriage. So I consider the down payment on the house and the money she paid on his loans sunk costs, just as the cost of the ring for him is a sunk cost. I think they just split up what they have now. Since she wants to walk away, I think she’s responsible for paying half of the difference between the house and the mortgage. So if they’re $16,000 upside down, trading her half of the savings ($3,000) plus her ring ($5,000) perfectly covers her responsibility. If the difference is more than $16,000, she still owes him, and if the difference is less, she shouldn’t give up the ring and the savings.

Mike Dunham September 2, 2009 at 2:45 pm

I *am* a divorce lawyer, and see this kind of situation all the time. Without knowing more than what was revealed in this post, here’s my gut reaction:

1. Don’t be so quick to call the husband’s offer a bad deal. We don’t have all the facts. Suppose, for instance, the house is worth $170K, but has mortgages against it totaling $181K? Then his offer is to take an “asset” worth -$11K, plus two more assets worth a combined $11K, for a total of zero. Meanwhile, she walks away and he takes the risk. That would be a good deal for the wife.

2. If he wants the house, and is willing to get her clear of the house, and there’s no equity in the house, then she should absolutely take him up on it. Yes, her parents gave them money, but that’s the point – they gave THE COUPLE the money. That makes it a gift to the marriage, which would be split in half either way. Had they not given them this money (e.g., if it was a properly documented loan, or if they were simply $11K deeper in the hole on the house right now), then I don’t think anyone would say this was a bad deal. Put it this way – assuming the house isn’t worth more than the debt against it, then this “asset” has a value of zero – half of which is zero. He is essentially offering to take it on the chin in the short term, perhaps gambling that the house will appreciate in value down the road.

3. Assuming #2 is close to the truth, then I would probably advise her to keep the engagement ring but give up the savings, as that’s close to a 50/50 split.

4. All this goes out the window if there is significant equity in the house notwithstanding (or in spite of) the economic downturn, but I would bet that’s not likely.

5. Money already spent is gone. Unless one side literally paid for everything (doesn’t sound like the case here), she will almost certainly spend more money fighting over this than she will ultimately get back.

@ Matt (and the many others who probably share his view) – while your point may be well taken, keep in mind there are some who do not want to be divorced, but who find themselves in a situation where divorce is forced upon them. If one party wants a divorce, it doesn’t matter what the other party wants, there is going to be a divorce sooner or later. It is not “giving up”, under these circumstances, for one to ensure that s/he is fairly treated in the process.

Matt Jabs September 2, 2009 at 3:11 pm

@Mike: My comment is directed toward the one who made the decision to divorce.

Jenna September 7, 2009 at 9:52 pm

First, neither party should leave the homestead. Start living as individuals close the joint accounts and share the bills to the level that is right. The engagement ring is hers it was a gift. The down payment on the home is legally hers it was a gift as well to her from her parents. The fact that she has paid so many of his bills she is likely entitled to some payback.
Get what you paid for in life ! You will regret otherwise when you are too old to work and find you still have to due to lettting someone else get a free ride like this soon to be ex husband wants.

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