The allocation of debts and obligations is the other half of the Marital Estate and just as important and in fact may be even more important than the allocation of assets in dissolution of marriage. The Illinois Statutes talk about the division of Marital Assets and the allocation and assignment of Non Marital Assets, but have neglected the explicit problem of allocation of liabilities. It is only by understanding that a “fair share of the Marital Assets” is “legal speak” for being sure that you don’t just allocate the asset without regard to not only the associated debt but also to the general unsecured marital debt.
No rational person would allocate a marital residence to one party without first assigning the responsibility for the payment of the mortgage (and in today’s world, the dreaded home equity line of credit “HELOC”
Before you can consider debt, you need to look to the history of the debt. If it predates the marriage, it is probably non marital.
This might be a good time to explain the term “Marital” and “Non Marital”; it is probably an over simplification but if you look at all assets and liabilities in the name of either or both parties or held for the benefit of either or both parties, directly and indirectly are “Marital” (and here is the key language) except for those that are non marital. You can get one idea from this: if you can’t fit into a non marital exception, then it’s marital. Generally the effect of such a classification is that a court (the Judge) has the authority to allocate a Marital Asset or Liability to either party, but cannot change the ownership of a Non Marital Asset or obligation of a Non Marital Liability
This becomes important in today’s world where the marital residence is the major asset of the parties. Its fair market value (valued as of the effective date of the dissolution of marriage unless otherwise provided in the orders or agreement of the parties) is more frequently, less than the debt associated with the residence, i.e.: the mortgage and/or HELOC. Add to that complication which has more and more evolved is the fact that the residence is in both names (joint) but the debt which is a lien on the residence is only guaranteed by one of the parties; this even occurs where the residence was owned by one party who has personally guaranteed the mortgage and then the residence is transferred into joint tenancy during the marriage but not refinanced (transferring non marital property to both parties gives rise to a rebuttable presumption that it was converted into Marital Property (but what about the debt . . .??)
I try to utilize a simple balance sheet approach to sorting out the problems and that should be a cooperative effort with the client. To first establish a list of the assets and liabilities and then determine:
a. Are they Marital or Non Marital
b. Are they associated with certain assets (i.e.: a car with a car loan, a residence with a mortgage or HELOC etc)
c. How are they titled (in whose individual or joint name on the asset or on the account) for example a credit card may be incurred during the marriage by either or both of the parties.
d. Valuation: what is the balance on the mortgage, charge card or credit card; Fair market value of the asset (and historical cost); who paid for it and was it purchased with Marital Debts?
Before we go on, there are the issues of hidden assets and (I’m sure you will be surprised), hidden (contingent) liabilities. What about that IRS lien of two years ago that hasn’t bothered you recently and then closes your checking account or seizes your savings account a year after the divorce is over.
The law relating to hidden assets is clear:
a. if you did not know and were not able to discover an asset (this has to do with “diligence” which means that you did all the legal steps of discovery and the asset was concealed;
b. its effect is material (it would have made a difference at the time of the divorce); and,
c. most important, the Petition to Vacate the Judgment (the technical term to reopen the case) must be filed within two years from the date of entry of the Judgment or of your discovery of the asset (that is not the actual date of discovery, but the date that you could have discovered it if you were diligent);
Opening up a judgment for additional assets or to asset liability from concealed or hidden assets or debts, is not an ideal way to conduct your divorce, the time to do this is always before the final judgment is entered.
Aside from the issues of concealed assets or liabilities, one these and the associated questions are answered, then a balance sheet of the marriage will arise and the process of the allocation and division of the assets and liabilities (debts) can be achieved.
If you don’t get anything else from this essay, you should understand that the focus on asset allocation without the similar focus on the debts of the marriage will cause unexpected and harsh results.