||Ask the Dollar Diva
Divorce and debt
Dear Dollar Diva,
I am trying to get myself situated to file for divorce. My husband
has caused me many credit problems, has us in major debt, and refuses
credit counseling. I have a 401(k) and am only entitled to what
I had in there before the marriage and half of what was in there
after the marriage.
Since I know my husband will not pay half of our debts,
is it smart to borrow from my 401(k) so he doesn't get half and
not pay for bills? Will I lose more by doing this?
Will I lose more in investments by taking out a large
loan to pay the bills off, or should I take the risk of him not
paying pursuant to court order? I can't see giving him half of the
401(k) in a lump sum because I know he will not pay me and will
probably squander the money he gets.
It's too bad your husband turned out to be so irresponsible.
However, it is what it is, and now it's time to pick up the pieces.
Here are a few things to consider in making your decision regarding
the debts and 401(k) plan:
When you think of equitable distribution in a
divorce there are three columns -- what goes to the husband,
what goes to the wife and items not subject to equitable distribution,
i.e. non-marital, such as inheritances and pre-marital assets.
If you don't think your husband will pay his share
of the debts, you can put his share of the debts in your column
as well as his share of the assets to pay for them in your column.
If one of the assets is your 401(k) plan, make sure you take
a subtraction for the penalties and tax you will have to pay
for early withdrawal to pay the bills. Normally, withdrawing
from a 401(k) to pay debts is not a good idea, but it beats
giving him the money from the 401(k) plan to squander and ending
up having to pay the debts yourself.
If you borrow from your 401(k) plan to pay the
debts, you're going to be replacing your current debts that
he's not going to pay with a debt to your 401(k) plan that he's
not going to pay. You end up holding the bag. And if you leave
your company, you will have to pay the loan back fast, or end
up having it re-characterized as an early withdrawal subject
to a 10 percent early withdrawal penalty, plus a 15 percent
or 28 percent income tax on the withdrawal.
How did your husband cause all of these credit
problems? Did he gamble? Did he spend the money on items that
benefited only him, not the family? If he dissipated family
assets, you are entitled to a refund of your share of the marital
assets he threw away.
There are a number of different ways to compute
the equitable distribution of assets, such as retirement plans,
when premarital and marital are co-mingled. Make sure you compute
it in such a way as to give the premarital portion the greatest
I hope this helps you. A good attorney is a girl's
best friend at times like this! Don't use a regular attorney
-- he may have a cheaper hourly rate, but he'll spend a lot
more time on the details than someone whose practice is limited
to divorce and family law.
-- Posted: Jan. 20, 2000