“L” Is For “Loan”
How are Loans Dealt with in Equitable Distribution Upon Divorce?
Continuing our theme of reviewing the basics of divorce letter-by-letter, we arrive at the letter “L,” which brings us to a discussion of how loans are dealt with in equitable distribution. There are many different types of loans that can be addressed in a divorce. First, if the parties own a home, there is often a mortgage associated with that home. A mortgage is a type of loan that is secured by the house, itself. If such a mortgage is not repaid, the bank can seek for the home to be sold and then apply the sales proceeds to the outstanding loan. When calculating the equity in a home, an attorney will need to know the value of the home, as well as the amount of any mortgages or home equity loans against the home. Assuming the mortgage was taken out to purchase the home and the home equity loan was taken out to improve the home, these loans will offset the value of the home when resolving an equitable distribution of assets.
Another type of loan that is present in many divorces is a business loan (which can include a credit line). A business loan or a line of credit permits the business to finance its obligations over time. Business loans can be used to purchase specific items, such as computers, copiers, or other equipment that is necessary for the business. These loans must be considered when determining the value of the business during equitable distribution.
Third, many people going through a divorce will have a car loan. A car loan must be considered when determining the value of a car for equitable distribution purposes. If a car is worth $20,000 according to the Kelly Blue Book or another valuation source, but has a loan outstanding of $25,000, the car has “negative” equity. In contrast, if a car is worth $20,000 and has a loan of $10,000 outstanding, the vehicle has equity of $10,000. Thus, the existence of a loan can have a major impact on determining what is actually available to divide between the parties.
Fourth, family loans may also arise in the context of divorce. A parent may loan a child money to obtain counsel for the divorce or pay family bills. Many times, loans are made by parents to children for home purchases or improvements. These loans may be formal or informal. Sometimes family loans are accompanied by promissory notes that address repayment. Other times, there is nothing more than a handshake that “confirms” the loan. These types of loans can be disputed during a divorce, especially those without any documentation that confirms the existence of the loan. Parties will often contend that a loan was actually a “gift” without any obligation to make payments against the obligation. Courts will want to see any documentation that was signed around the time of the loan (if any documentation was signed). A Court may also want to more clearly understand whether the loan was repaid during the marriage. The more indicia that the family loan was a “real” loan, with repayment terms and actual repayments occurring during the marriage, the more likely it is for the Court to factor the loan into its equitable distribution award. If, however, there is no documentation evidencing the loan and no history of repayment, the Court may choose not to consider the loan when determining a fair equitable distribution.
When preparing to meet with an attorney at Ulrichsen Rosen & Freed to discuss divorce, it is important to make sure that the attorney has an understanding of not only the marital assets, but also the marital liabilities (another word that begins with “L”), which usually consistent largely of loans. Please contact us if you have any questions regarding this topic.