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401K's the Versatile Marital Asset in a RI Divorce!

Today's Question:

    For the sake of this question I'll call myself William.  I have a 401k that I began 10 years before I got married.  It had about $75,000 in it before Tammy and I got married.  We've been married for the past 13 years and my 401k is up to about $285,000.  I'm concerned about being able to pay my attorney's fees.  I'm also concerned because I want to keep the house my wife and I live in.  The house has been in our family for generations.  I don't think I can get a loan to buy out my wife's interest in the house because my credit isn't so good.  We have about $140,000 in equity in the house.  What can I do to save my house?  One attorney has told me that Tammy will get 1/2 of my 401k and that I can't touch my 401k monies while the divorce is pending.  This doesn't seem fair.  It looks like I'm going to lose 1/2 of everything I built.  I know Tammy is entitled to part of everything but it seems like I'm being left with no options but to lose the house and 1/2 of my 401k.  Is there anything I can do here?

    - William  (Coventry, RI)

Today's Answer:

    William, I can tell you that you have more options than you may think.  Ultimately, your 401k plan is the key to resolving your difficulties.  A 401k if much more versatile than a pension, annuity, IRA or any other investment vehicle. 

    First, Check with your 401k Plan Administrator.  Ask whether you are allowed to take a loan up to a certain percentage of your vested 401k balance.  Then confirm the amount of your vested balance and the allowable loan that you could take from your vested balance.  Loans on 401k plans are typical and are usually limited to 50% of your vested balance.

    For the sake of example let's assume this is a typical 401k plan and you can take a loan of up to 50% of your vested balance.  Based upon the numbers you have provided, I would be willing to venture a guess that you may be told that the entire $285,000 is vested and that your maximum allowed loan at 50% would be limited to $142,500.  You should also find out how much interest will be charged on whatever loan you take out and the maximum repayment period.  Of course you will be repaying yourself the interest so this is a considerable benefit to you.  Plus, you can check with your accountant to see if any of the 401k interest is potentially deductible because it is used as a buyout of your wife's interest in the real estate and adds to your adjusted basis in the property.

    Now William, there are a few things to take into consideration but careful planning will eliminate difficulty.  If you are already in the midst of a divorce then your are bound by the Automatic Orders of the Court.  These Orders prevent you from spending, hiding or doing anything out of the ordinary with any assets without the written consent of your spouse.  You may not unreasonably incur any debt that is not in the normal course of your home or running your business except for paying your attorney's fees.

At the outset this looks like it poses a massive hurdle but your case is a bit different.

The Rhode Island Family Court has the power of equitable distribution over the marital estate.  This means the marital assets and debts of the parties.  This does not include pre-marital assets.  You have already disclosed that your 401k had a value of $75,000 before you got married.  This $75,000 is a premarital asset.  These funds are yours.  Additionally, any appreciation relating solely to those $75,000 is also a non-marital asset because they are funds generated purely by virtue of a the pre-marital asset without further contribution from the parties.  Thus if over the 13 years if your 401k averaged 7% per annum return then your $75,000 has roughly appreciated to $180,738.38 making the marital portion of your 401k $285,000 minus $180,738.38 which equals $104,261.62.    The $104,261.62 should roughly be the true marital portion for distribution by the Rhode Island Family court.  It is certainly viable for you and your attorney take the position that this should be undisputed and that $180,738.38 is truly a premarital asset to which your wife is not entitled. 

If you are allowed a 50% loan to vested monies then you have in excess of $90,000 that you can take as a loan for both your attorneys' fees and to buy out your wife's interest in the house.  If your wife's share of the house equity is agreed to be $70,000 then even with poor credit you should be able to secure an equity line of credit or a refinance of the house even if you take out a loan of $40,000 and put $35,000 toward the house and rely upon $35,000 of the house equity to balance out the loan.  This also leaves you with an additional $5,000 for attorneys' fees.

If you take out a loan of $35,000 as suggested, then you still have $145,738.38 that should remain a pre-marital asset that you are entitled to claim as a pre-marital asset.

Keep in mind that this is an arguable position.  Technically, it is a judge's role to determine whether an asset is marital, non-marital, premarital or otherwise exempt from the court's equitable distribution power.  However, when the issue is as clear cut as this in accordance with the statutes, most judges will not penalize an individual for following the advice of his attorney in order to settle a matter on the judge's calendar.

If the judge disapproves of the manner in which you proceed and finds the circumstances to require the court's authority, the most likely conclusion is that the Judge will consider any disproportionate amount as an offset to your spouse against the marital estate.  However, pursuant to the Rhode Island General Laws this is an arguable position that you should be able to take and use without the written permission of the other party or an order of the court, especially if it is used in an effort to settle the case. 

However, if the funds are used for purposes other than settling the case, be prepared for the court to take more appropriate actions to punish you as an abusing party even if you are within your legal rights.

Authored By:

  Christopher A. Pearsall
70 Dogwood Drive, Suite 304
West Warwick, RI 02893

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Paying for your Rhode Island Divorce Lawyer

Paying for your Rhode Island Divorce Lawyer doesn't come cheap depending upon who you hire.  Many people feel trapped and unable to file for divorce simply because they don't have the monies to hire a decent Rhode Island Family Lawyer.

However, if you have a credit card, whether it is in your own name or jointly held with your spouse, that credit card can be used to hire the lawyer.

Now most people might worry because all they believe they are doing is increasing their debt.  However, there are a few considerations that may outweigh the use of a credit card to pay for the attorney who will represent your rights.

First, if you don't hire the attorney, might you take a greater loss on your rights than the amount you are putting on the credit card.  Second, if your spouse has an attorney or even if he doesn't, isn't it reasonable to claim that the hiring of the attorney was a necessary expense to help the marriage come to its conclusion fairly and equitably?  Both issues are more than reasonable and it is an entirely valid argument to make to the court that the charge for your attorney was reasonable and necessary and therefore it is a marital debt just like any other.  This is especially true if your spouse was the party filing for the divorce.

If you need to hire a lawyer for your divorce and your only recourse is a credit card, it is probably your best bet to use the card, protect your rights and hire a decent family law attorney.

Authored by:

Christopher A. Pearsall, Esquire
571 Pontiac Avenue
Cranston, RI  02910
Phone:  (401) 354-2369

Attorney Pearsall's practice is focused almost exclusively in the areas of Divorce and Family law.

NOTE:  The postings on this website are NOT legal advice, DO NOT create an attorney/client relationship and are NOT a substitute for a detailed consultation with an attorney experienced in the state where you have your legal issue.  This site is based on Rhode Island and is presented for the convenience of the internet public.

* The Rhode Island Supreme Court licenses all lawyers in the general practice of law and has no procedure for recognition of specialty in any area of law.

Rhode Island Divorce Attorney - Dealing with Credit Card Debts

Credit cards are often one of the most consistent types of debts that is dealt with in Rhode Island Divorce case.

Credit cards can pose their own divorce difficulties. Some years back, at the beginning of my divorce practice, I thought that credit cards would create the same issues as any other debts. I quickly learned from a few practical case experiences that credit cards come with their own considerations that may or may not make a difference to your client.

So what makes credit cards different? 

First and foremost, because of the explosion of the internet in the last decade or so credit cards are easy to apply for and if a person has a decent credit rating they are pretty easy to get, not only in your own name, but in a spouse's name as well.

Another aspect of credit cards is the "authorized user." The authorized user is a person who is authorized to use the card to charge things but is not obligated to pay the credit card bill itself. An authorized user is usually placed on the credit card account by the primary cardholder and receives their own card in order to make charges against the account. It is only the primary credit card holding that is held liable for paying the credit card bill.

A third aspect of credit cards that consumers are generally aware of that can play a role in a divorce is their high interest rates. Credit card interest rates can run from 9% to 29% interest or more and can fluctuate with the market or even with the timeliness of your payments depending upon your contract with your credit card company.

One other challenge that may affect the equitable distribution of credit card debt is what I call the "shifting balance." The shifting balance occurs when a primary cardholder, either with or without discussing it with his or her spouse will shift the outstanding balance on one credit card to an entirely different credit card that is usually offering a promotion of say "O% APR for the 1st Six Months for Balance Transfers" or "0% APR for the 1st Three Months for Balance Transfers PLUS a $5,000 Credit Line Increase for Qualified Participants".

Now let's take an example or two to see how one or two of these factors could affect a divorce proceeding.

Christian and Teresa get married in their late 20's. Both of them have good paying jobs and impeccable credit. The housing market is a bit pricey so they decide to wait so they can get a house that really suits them. Things are fine for about a year or so when Teresa gets a promotion which requires her to travel overseas for business negotiations. Teresa gets a credit card offer and without discussing it with Christian she qualifies for a $10,000 credit line. While traveling for business Teresa develops a need for fine clothing if she is to get further ahead in her career.

In a short period of time she charges up $10,000 of designer clothing which she slips into her closet in their apartment a bit at a time.

Meanwhile, the housing market has dropped somewhat and Christian wants to look at houses. Teresa tells Christian that she thinks she'll be up for a promotion soon and it will make it financially easier to make the purchase if they wait. Christian agrees that it's a good idea.

Teresa actually does get a promotion and immediately calls her credit card company to get a credit line increase. Her credit card company increases her limit to $22,500 and on her next tip Teresa uses up all but $200 of her credit line.

Again Teresa brings the clothing home and slips it into her closet unnoticed. The next day Teresa's manager calls to tell her that as a bonus they are sending her to Las Vegas for five days next month.

Teresa is very excited and since Christian is working late she fills out a credit card application using his information and income and requesting a credit card balance transfer of all the monies on her card to this new card. She also indicates that she is to be an authorized user on the card.

A week later the credit card comes in the mail approved for Christian for $45,000 as the limit and it already has Teresa's balance transferred to it so that now her own card has a zero balance.

Teresa goes to to Las Vegas and gambles the night away, using up her credit card limit. She's not satisfied so she pulls out the card she took out in Christian's name and gambles it to its limit. It's not until the plane ride back that Teresa realizes the severity of what she's done.

For several months Teresa is able to intercept her credit card bill as well as Christian's but she is late on two of the payments and the credit card companies penalize Christian's card by increasing the interest rate from 9.19% to 29% on everything charged over the 0% balance transfer. Teresa begins making double and triple payments on the card in Christian's name in order to repair any blemishes to his credit but she is too late.

Christian goes to the bank to get pre-qualified only to discovery that a card has been taken out in his name with a less than perfect payment history and a balance of just under $45,000. He is worried that his identity has been stolen but when he calls the credit card company and they fax a few statements to him he realizes that the charges all coincide with the places Teresa has been going.

Christian gets home and confronts her about the credit card in his name. Teresa denies it adamantly for about 2 hours and then admits what she did. He asks her if there is anything else he should know about and she tells him "No".

Christian is very upset and very hurt that his wife actually stole his identity and damaged his credit when she knew how important it was to him and how necessary it was to get a house. Christian asks Teresa to meet him at the bank tomorrow to see if they can still prequalify for a house. Teresa refuses and says she likes their apartment.

Christian goes to the bank the next day and the bank representative pulls Teresa's credit at his request. Christian sees the credit card and the poor payment history. The banker makes it clear that there is no way Christian and Teresa will pre-qualify for a house based upon the outstanding debt and payment history. The banker suggests that it will take several years to repair the damage that has been done.

The banker recommends that Christian file a fraud report with the credit card company and file a report with the Rhode Island State Police. Christian doesn't want to do that.

Christian is crushed by Teresa's betrayal of trust and he files for divorce.

What issues might arise regarding this credit card debt?

1. Does it matter that Teresa's action in opening an account with Christian's information is a criminal offense?

2. Can Teresa claim that her clothing purchases were for her employment which benefited the marriage and therefore were marital debt?

3. Since Christian refused to fill out a fraud report and a Rhode Island State Police Report has he conceded that the debt belongs to him? Or has he conceded that it's marital debt?

4. If Teresa can legitimately take business tax deductions for the clothing she purchased as well as the gambling losses during her business bonus trip, should that affect the amount of debt that Teresa should be responsible for in the divorce?

5. Is there anything the family court judge can do to repair or minimize the damage done to Christian's finances and his credit?

6.  Can any of this be considered marital debt when Christian had no idea this debt was accumulating?

7. If Christian thinks he shouldn't have to pay anything, what is the most likely amount he could be ordered to pay and where does that amount come from?

There is at least one more issue that affects Christian significantly in this whole scenario. Can you identify it? It could make a huge difference financially to Christian. If you were Christian, wouldn't you want to find it.

All My Best to You on Your Journey Through The RI Family Court,
Attorney Christopher A. Pearsall - "The Rhode Island Divorce Coach" 

Understanding Debts in a Rhode Island Divorce

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Authored By:  Christopher Pearsall, RI Divorce Attorney
a.k.a.  " The Rhode Island Divorce Coach ℠ "

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One tip that is good to remember about debts in a Rhode Island Divorce is that while Rhode Island divorce judges have the power to assign responsibility for all or part of the debts to one or both parties in different proportions, the original debt contract remains untouched.

This is often overlooked or misunderstood by clients.  Assume for the sake of example that you and your spouse finance several computers during your marriage and you both signed the finance contract.

At the time either of your settlement or your divorce trial your spouse is held to be responsible for the entire computer finance contract account. 

Later you start getting incessant calls from the finance company about paying on your computer contract.  Apparently, your spouse isn't paying as he was supposed to do.

You can tell the computer finance contract company that per your divorce your spouse is responsible for the account until you are blue in the face and it won't matter.  In the finance companies' eyes and in the eyes of the law you are still responsible for the account.

The orders of the Rhode Island Family Court are binding upon you and your spouse but they DO NOT modify your contracts with the creditors.  If you keep this in mind then you'll be aware that you can still be annoyed  with collection calls, still be sued for outstanding balances, and still have your credit destroyed . . . for an obligation you were not found responsible for by the court or which your spouse agreed to be responsible for.

Rhode Island Divorce vs. Rhode Island Separation

Though it is rare, sometimes Rhode Islanders or those people who have an issue relating to the Rhode Island Family Courts will want a solution other than just getting a divorce.  One option you may consider is to become "legally separated".

Yet what is it though?  Essentially.... it's a divorce..... without the divorce!  Strange...but true.

You deal with the  issues in family court the same way you do a divorce but rather than dissolving the marriage, the legal marriage between you and your spouse remains.  The assets and debts are usually split and apportioned.

If there are children then placement and legal custody are determined by the Rhode Island Divorce judge.  Sometimes spousal support becomes a factor for consideration.  Visitation is usually established  for the non-placement parent and an order issues indicating that you are legally separated.

However, you remain married with all the legal benefits of marriage and the detriments as well.  For instance, you can still file your taxes as "Married filing Jointly" . . . but since you remain married you may not remarry.

Legal Separation is an avenue that I have seen very few people take because usually the marital breakdown does not lead to reconciliation or, if it does, a divorce proceeding usually brings the seriousness of the matter to a head more quickly than a legal separation.

The parties most seriously consider the ramifications of their actions in a divorce proceeding during the statutory cooling off period before the divorce is granted.  If there is any doubt about their decision
on both of their parts, they can decide to withdraw their Rhode Island Divorce from the court's consideration before the final judgment enters.

If, during the course of a legal separation proceeding a party knows that he or she wants a divorce, then the party can move to have the separation matter converted to one for a Rhode Island divorce.

The question as to whether to file for a Rhode Island Divorce or a Rhode Island Separation is one that is a matter of choice.  However, in my humble opinion, absent a compelling reason to opt for a legal separation and the end result that it provides, it is best to seriously considering filing a divorce proceeding.  This suggestion is not intended to advocate divorce, but rather is a suggestion of practicality. 

If a party has opted for a legal separation, in my opinion they may need to do so for the legal protections it affords while trying to sort out the marriage.  If this is the case then there is a loss of trust with the other spouse such that he or she needs to be compelled to continue to provide for the other or for the children.  In the absence of this trust and the need for court intervention to insure the protection of one party or the children, the result of a legal separation order, carries much less weight than that of a divorce decree.

There is something to be said for the idea that in a marriage, we are as spouses are bound to one another.  Neither of us may remarry and infidelity is most assuredly frowned upon.  We have obligations to our debts with our spouse and with our children, if there are any.  There is typically a reliance there and hopefully at some time in the relationship a bond of trust.

Yet the finality of a final judgment of a divorce is like the resounding tone of the thud of a tree as it falls in the forest.  Once cut from the ground it is separate and apart from the stump which has been a part of it and enabled it to get nourishment and the stump is now exposed and widened with a more difficult path of any type of growth a head.  It is the finality of the divorce decree that makes people think and
it is this factor that helps parties determine in the "cooling off period" between their hearing date and the date when the final judgment may enter that reconciliation is most likely.

So what happens if you get a Rhode Island Separation Decree and subsequently want to divorce your spouse?

You must file for divorce and go through the proceeding all over again.

Authored by:

Christopher A. Pearsall, Esquire
571 Pontiac Avenue
Cranston, RI  02910
Phone:  (401) 354-2369