Equitable Distribution of Debt

>Often times, when I meet with a new client, they will tell me that a parent, a sibling, great aunt, or good friend loaned the client and the spouse money that must be considered a debt to be repaid in equitable distribution. Many times, this was for a down payment for a house, or to get the couple through difficult financial period. The other party, just as often, takes the position that the “ loan” was really a gift. And so the games begin.

Generally, in the law, a gift has several elements. First the he donor must perform some act constituting the actual or symbolic delivery of the gift. Second, the donor must possess the intent to give. Third, the donee must accept the gift. There us also an additional element, which is the relinquishment by the donor "of ownership of the gift. A loan, on the other hand, is generally defined as The giving or granting of something, particularly a sum of money, to another, with the expectation that it will be repaid (typically with interest) or returned.

When comparing these in the context of a divorce, several questions come to mind. First, if the money was given when the parties purchased a home, was there a “gift letter.” This is very often required by the banks in order to make sure that the money is not a loan. If there is such a gift letter, this is often the end of the inquiry. On the other hand, if there are periodic payments to the person who gave the parties the money, then it may in fact be considered a loan for purposes of distribution. Continue Reading A Loan by Any Other Name Is a… Gift… To Be Shared

In light of the current economic crises plaguing our country, your home may be on the brink of foreclosure, or will be sold by way of a short sale. You may also have staggering credit card debt. Therefore, when entering into a property settlement agreement that involves debt forgiveness (i.e. foreclosure, short sale, and reduction in credit card debt) it is critical that you choose a matrimonial attorney that is aware of the tax consequences associated with debt forgiveness because the financial impact can be enormous.

Historically, debt that was forgiven or cancelled by a commercial lender must be included as income on your federal and state tax return and was taxable. For example, if the total amount of the mortgage debt immediately prior to the foreclosure was $220,000 and the fair market value of the property was $200,000, the amount of the debt forgiven, $20,000, was treated as taxable income. Unless of course the borrower qualified for an exception under the Federal Tax Code, i.e., bankruptcy, insolvency, certain farm debt, and non-recourse loans.

On December 20, 2007, the Mortgage Debt Relief Act of 2007 (hereinafter referred to as “the Act”) was enacted. Said Act provides financially strapped homeowners with some relief in connection with treating debt forgiveness as income. Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on a principal residence that occurred in 2007, 2008 or 2009. Moreover, there is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven.Continue Reading Debt Forgiveness: Watch Out for the Tax Consequences

In the recent unpublished Appellate Division matter of McDermott v. McDermott, A-0631-07T1, Decided February 20, 2009, the Appellate Division remanded the matter to the trial court for further proceedings on the amount of loans taken during the marriage from plaintiff’s family and the distribution of responsibility for repayment of those loans.

The parties were married for nearly 30 years.  Plaintiff/husband was an attorney with a solo practice and defendant worked at his office for many years, helping to raise their five children and eventually finding employment outside the home with a local school district.  During the marriage, the parties primarily relied upon the income earned from plaintiff’s law practice.  This income fluctuated throughout the years, in part due to the economy and in part due to plaintiffs bouts of depression.

During the 15 day trial in this matter, testimony was offered that during the course of the marriage, plaintiff made some unilateral decisions with regards to the parties’ finances, including taking loans from his family and purchasing property without notifying defendant, who only found out during trial.  Defendant claimed that she only knew of very few of the loans given by plaintiff’s family, however evidence submitted at trial indicated otherwise.  Plaintiff’s sister offered credible testimony that the total amount of loans given was $283, 398.50 of which only $6,300 was repaid.

After the trial, the trial judge issued a written decision, which in part, obligated defendant to repay plaintiff’s sister the amount of $57,165.31 as her share of loans made to the marital partnership; valued plaintiff’s law practice at $100,000 of which defendant was entitled to half; compelled plaintiff to pay $2,000 per month in limited duration alimony for a period of 6 years; and ordered plaintiff to pay $49,000 of the $80,202.70 counsel fees incurred by defendant in the divorce litigation.Continue Reading Appellate Division Says More Information Needed To Determine Division of Debt