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How to Protect Your Money in a Divorce During a Recession

Husband and wife fighting over money
Written by Paul Deloughery

You’re stuck in a bad marriage. It was tolerable when you at least had money for entertainment and could get away at the office during the day. But now the economy is causing your bank balance to drop like a lead balloon. You’re stuck at home with your bad decision (aka, spouse). And you wonder how to protect your money in a divorce during a recession.

Going through a divorce and dividing your already depleted savings in half doesn’t sound appealing. So, what are your options? Here’s a rundown for you. If you want to skip over the bad ideas, go to the last three options. There is some General Advice at the end. Follow that General Advice no matter which of the options below you choose.

Advice by an asset protection attorney

By the way, I’m an asset protection attorney. That means that I help people protect their hard-earned money from divorces, lawsuits, bankruptcy, IRS audits and government actions. The following advice, however, is not based on me trying to sell anything. I’m honestly trying to just give good, honest advice. Oh, and by the way, nothing in this article about protecting your money in a divorce during a recession should be construed as legal advice. I’m not your attorney until you contact me and we enter into a signed agreement. Contact me here to get help protecting your money in a divorce during a recession.

Want quick advice? Schedule a Bulletproof Your Assets Strategy Session now.

How to Protect Your Money in a Divorce During a Recession

Option 1: Transfer or dispose of assets before divorcing.

I refer to this as the “Panic Approach.” And it usually doesn’t work. You might get away with concealing an asset or income while your marriage is healthy. But the court will scrutinize your financial dealings when you file for divorce.

The act of initiating divorce proceedings gives the court jurisdiction over your property. In other words, the judge has the final say about what happens to it. Reaching a property settlement agreement with your spouse doesn’t solve the problem either. A judge must still approve that agreement before your divorce gets finalized.

You might think it’s okay to hide an asset in advance of filing for divorce, before the court takes jurisdiction. But this can be a bad idea for many reasons.

Whether you conceal or transfer an asset and the asset is later discovered, the result is the same. The court can take the position that you did it in contemplation of your divorce. In other words, you were “divorce planning.” The court then has the power to bring the asset right back into the marital pot for distribution. And you may not like the result.

Don’t Make This Mistake

The California case of Rossi v. Rossi is a notorious example. In that case, Denise Rossi purchased a winning lottery ticket worth $1.3 million. She then filed for divorce less than two weeks later. She stashed the money aside without telling her spouse or the court about it. The judge awarded the entire $1.3 million to Thomas Rossi due to his wife’s dishonesty.

Angry judge

A judge could punish you for hiding assets immediately prior to filing for divorce.

Many states take the position that the timing of the asset transfer is pivotal. Two weeks seems to be pushing it. But how about disposing of property five years before filing for divorce? And let’s assume your marriage was still strong at the time. In that case, the court may not be as concerned, depending on your state. Each state has different laws. So, you would need to talk to a divorce lawyer in your state for a definitive answer.

The Rossi decision was somewhat extreme. Yet, it shows how the courts in some states will punish a spouse for hiding an asset from the divorce court. In the Rossi case, the court awarded the entire value of an undisclosed asset to the innocent spouse. Judges usually have discretion to make decisions that they deem fair and equitable, even if it doesn’t result in a 50-50 split.

A note about who has the burden of proof

Depending on your state, the burden of proof may be on you to prove that the action you took was innocent. Or, your spouse may have to establish that you attempted to take the asset out of the proceedings. At the least, the court may adjust the property division if the hidden asset comes to light. Your spouse had a legal right to a share in it if it disappeared without her agreement or consent. This is true even if the asset no longer exists.

The Popular Family Transfer Mistake

Assume that you had $50,000 in a bank account that your spouse did not know about. You then transferred that money to a family member. You and the family member have an understanding that you would get it back after your divorce was final. Also, assume that your marital estate gets distributed 50-50. In that case, you would owe your spouse $25,000 regardless of whether you still own it or can take it back. The court might award your spouse something else of similar value or you may have to make her a cash payment.

Finally, in most states you need to file a financial affidavit or statement with the court. In it, you detail your assets, liabilities, income, and expenses. You must sign it under oath. If you do not include an asset that exists, you are committing perjury (which is a crime).

Summary of Option 1

In short, hiding money or assets before getting divorced is almost always a bad idea. And doing it during a recession when your marriage is already on the rocks will not end well. But talk to a lawyer before trying to diagnose your own situation. Some assets are not considered marital property (or community property) anyway. So, you may be worrying about nothing.

Want to protect your assets? Schedule a Bulletproof Your Assets Strategy Session now.

Option 2: You and your spouse work together to hide assets in the U.S.

This is a different type of “Panic Approach.” And it also usually doesn’t end well for the people involved.

This plan involves you and your spouse working together to hide assets from creditors. At least this way you won’t get penalized by the divorce court for treating your spouse unfairly. But financial distress brought on by a recession brings other challenges.

Violate This Bankruptcy Rule and You’re Stuck With Your Debts!

You both eventually may want to discharge your debts in bankruptcy. Many people in debt will qualify for bankruptcy relief. But some will disqualify themselves from bankruptcy relief because of their actions. For example, imagine it’s the year before you file bankruptcy. Then you transfer assets to a protective legal entity with the actual intent to hinder, delay, or defraud a creditor. In that case, the bankruptcy court may not discharge your debts. In other words, you’re stuck with your debts.

And what if you see an asset protection attorney such as me shortly before filing bankruptcy? In that case, you should get an independent second opinion from a bankruptcy attorney. Doing the wrong thing could result in certain debts never being discharged!

Here’s an example

Take this example. Imagine you have $150,000 of debt. And $20,000 of cash. You (and your spouse) transfer the $20,000 to your parents and then file bankruptcy. The bankruptcy court could refuse to allow your bankruptcy petition. The reason is that you tried to cheat your creditors. Then you’re stuck with the $150,000 of debt! (Plus, your parents may decide they need the $20,000 you gave them.) Not a good outcome.

Also, the IRS and state tax authorities are always “super creditors.” The same goes for Small Business Administration and some federally backed loans. Child support and alimony as well. All of these either cannot be discharged at all or are very difficult to discharge. Pay these creditors first! Even if there is a creditor who keeps calling and sending letters. Pay these “super creditors” first. And the absolute most important is your federal taxes. If you don’t your federal taxes, and have to file bankruptcy, the court can set aside fraudulent transfers going back ten years … including what you thought were innocent gifts to trusts and children.

Oh. And you need to consider what assets you’re transferring. Some assets are exempt from collection by statute. State law also protects these assets in bankruptcy. The types of asset that are protected depends on state law. Federal law protects ERISA-protected pension plans.

Don’t Do This Stupid Thing

You usually should not take money from a protected pension account and use it to pay a dischargeable debt like a credit card. Similarly, don’t refinance your house (which is protected up to a certain amount of equity) and use the money to pay off your dischargeable credit cards. But, again, check with your local bankruptcy attorney on this. The laws in each state vary.

Option 3: Transferring Assets Offshore.

Beach in Costa Rica

If you choose to move out of the U.S., be sure you know what you’re doing.

Let’s say you and your spouse count your assets. You calculate that you can live in Costa Rica or Portugal for the rest of your life. Can you ignore your creditors and skip town? After all, you could always get a divorce in your new country, right?

Well, you could do that. But then you may not be able to discharge your debts through bankruptcy. Sure, your debts may become uncollectible as the years go by. In the meanwhile, as you’re waiting for statutes of limitations to expire, are you willing to avoid visiting family and friends in the U.S.? In about one-third of states, you can be arrested if you fail to pay a judgment. Do you know for certain that you won’t be arrested in the airport (where you need to show your identification)?

Also, if you maintain your U.S. citizenship, you must report your new offshore accounts and investments to the IRS. You are required to disclose the exact location, account numbers, and the maximum dollar amount in each account each year. You must also report your foreign accounts on your personal income tax return, Form 1040.  Starting in 2011, Form 8938 also must be filed for all offshore accounts. If you fail to properly report your offshore accounts, you can be subject to criminal penalties and severe civil penalties that can exceed the amount in the offshore accounts.

Warning About Failing to Pay Federal Taxes

Let’s say, for example, that you decide to skip paying your federal taxes. Then you move to a country with no extradition treaty with the U.S. (like Cuba or Switzerland). You may get away with it, as long as you never return to the U.S. If you were to ever return to American soil, you have a high chance of being subject to IRS prosecution. You could even be arrested and jailed, depending on the seriousness of the matter. Your assets in the U.S. have a high chance of being confiscated. And the U.S. consular services may refuse to provide service if you’re ever in trouble abroad. So, if your new country of residence becomes a dictatorship and imprisons you, the U.S. will not come to your assistance.

The other option is for both of you to transfer your assets to a foreign asset protection trust.. And you just stay in the U.S. There are countries like Nevis and the Cook Islands that have trust companies specializing in such services. The idea is that you can remain in the U.S. and have a trust company hold your money in an offshore account so your creditors and courts cannot reach it. If merely protecting your money is your goal, then this will protect your money in a divorce during a recession.

Foreign Asset Protection Trusts and Bankruptcy Don’t Mix Well

However, here is a list of the reasons not to use a foreign asset protection trust to protect your money in a divorce during a recession. There is a significant amount of court cases in which offshore trusts were defeated. An offshore trust will not protect your real property or other assets located in the U.S. If you and your spouse later decide to file bankruptcy, all assets in your offshore trust must be disclosed to the bankruptcy court. Failure to make this disclosure is probably bankruptcy fraud and can result in criminal penalties.

You Could End Up In Jail

man's hands in handcuffs

If you try to hide your money outside the U.S., a judge could find you in contempt of court.

Let’s say you are not in bankruptcy. But your creditors are trying to collect their judgments against you in your local state civil court. The court will probably rule that your offshore trust is against public policy and will order you to turn over the assets of the trust. If you refuse to obey (and you technically cannot obey, because your assets are now in the hands of a Cook Islands trust company), the court will hold you in contempt of court and send you to jail until the trust company pays your creditors. If your assets are here in the U.S. and you attempt to transfer them to your Cook Islands trust at a time that your creditors are trying to get paid, the court can freeze your assets or get a restraining order. Such an order would prevent the assets from transferring to your offshore trust.

Summary of Option 3

To summary, if you plan to move out of the U.S. and thumb your nose at your creditors, you better be very committed to that idea. And please, talk to a lawyer first.

Option 4: Downsize your business and lifestyle.

In a recession, cash is king. In other words, in order to protect your money in a divorce during a recession … don’t spend it! Sounds easy when you say it. But actually cutting back on your personal and business expenses can be difficult when you’re the one making the decisions. Do not continue with “business as usual” when the economy has shifted.

Advice for business owners

If you own a business, it needs to downsize to stay ahead of declining demand. This means shedding expenses. Start with the biggest expenses (such as rent and payroll). Renegotiate for smaller space and let some employees go.

What to do about your personal expenses

About your personal lifestyle, stop spending! If you have two vehicles but only need one, sell one. Cut back on your living expenses in as many ways as possible. Sell vacation homes, extra cars, and other toys. Impose strict household budgeting for items. This may include downsizing your personal house. Or putting your kids into public school.

By the way, people with a more modest lifestyle are usually more able to negotiate with creditors. Such people are less of a target to creditors than those with a more extravagant lifestyle.

Man holding bag labeled "Debt"

A great way to get out of debt is to stop incurring more debt.

How to know if you need to keep cutting back on your expenses

Downsizing also means not incurring further debt. If you find yourself having to incur further debt, that is a good sign that you need to make even more dramatic cuts. In that case, keep selling assets and reducing expenses. If you’re a business owner, there is nothing smart about continuing to run a losing business. For sure, do not use your home equity line of credit to support your business (especially if your home equity is exempt in your state).

Option 5: Investing in Your Business – The Tricky Way to Protect Your Money In a Divorce During a Recession.

Yes, this is exactly the opposite of the previous option. But if you’re a business owner, this is an amazing way to protect your money in a divorce during a recession. This alternative is for experienced business owners who know whether their business is an asset or a liability.

Illustration of McDoanld's Arches

When Ray Kroc got divorced, he kept his McDonald’s business.

Ray Kroc, the founder of the McDonald’s Corporation, did this with his first wife. During his divorce, he insisted on keeping the business for himself. Apparently, the McDonald’s business had little value on paper at the time. But he believed in its potential. Maybe your business is struggling now and also has little value on paper. Are you savvy enough to know whether your business can become profitable in the future?

Here’s an example …

Take this example. Imagine that your spouse wants your $500,000 house. Should you let her keep it so you can keep your business? Well, it depends on whether your business is an asset or a liability. Assets produce wealth. Liabilities eat wealth. A house is a liability, because you have to pay to keep it. Your spouse will be stuck paying property taxes, insurance and upkeep on the house. The house will not produce any monthly income (unless it’s converted into a rental property). Meanwhile, a good business produces a profit, and is thus an asset.

Summary of Option 5

So, being a business owner gives you the option of keeping an asset (like the business) that may have little present value. But it can produce more wealth in the future.

Option 6: Online Marriage Counseling.

The cheapest solution to protect your money in a divorce during a recession is to work together and not get divorce. How do you work that out? Try simple online marriage counseling. To comply with the current social distancing guidelines, you can do this online. In the process, you can both address how to tighten your budget and better weather the recession.

When you run the numbers, marriage counseling is a bargain compared to the cost of a typical divorce. Online marriage counseling costs less than $400 per month. In comparison, divorce lawyers typically ask for $5,000. And your spouse will also need a divorce lawyer, for a combined total of $10,000. So, it might make sense to try marriage counsel … at least for a few months.

General Advice to Protect Your Money in a Divorce During a Recession

Here are some practical things to do to protect your money in a divorce during a recession.

Build up cash reserves.

Rolled U.S. dollar bills

Cash is king in a recession!

A rule of thumb during a recession is that cash is king. As I mentioned above, a great way to protect your money in a divorce during a recession is simply not to spend it. Having cash allows you to settle with creditors, and with better terms. Creditors often have their own creditors and expenses. A cash offer is much more valuable than another promise by you. (Why should your creditor believe your new promise if you had trouble keeping your prior one?) In a recession, it makes sense to sell unnecessary assets sooner than later. Smart debtors liquidate as much as possible early and build up cash savings.

Pay your taxes.

If you don’t pay your taxes, and end up in bankruptcy, the IRS and other creditors can take advantage of a 10-year Statute of Limitations. This means they can attempt to set aside any of your transfers of assets going back a full ten years. This includes gifts to your kids and any sort of asset protection planning in an attempt to protect your money in a divorce during a recession.

Get out of personal guarantees.

A large number of non-consumer bankruptcies are the result of personal guarantees. This may not have been a problem when the money was flowing. But now that we’re in a recession, a personal guarantee is like a noose around your neck. What should you do? Try to negotiate your way out of the personal guarantee before the creditor begins legal proceedings against you. It is better for you to sell things and raise money to buy out of a personal guarantee. If the loan is called and the creditor gets a judgment against you, the local sheriff will be selling those assets at fire sale prices. You’re better off selling them yourself now.

Downsize now.

Recessions usually last a number of years. Despite lots of promises by politicians, it’s probably safer to look at any of the last five or twenty recessions (which happen predictably every 10 or 12 years). During every recession, it usually takes years, not months, before the bottom is reached. The sooner you sell unnecessary assets (boats, vacation homes, extra vehicles), the higher the price you’ll receive. And that means having more cash on hand that you can use to buy bargains when the recession hits its bottom.

Make your business lean and mean.

Recessions force businesses to reduce overhead and become more efficient. A good business owner will do this immediately. It’s easy to have excess fat when times are good. But it’s easier to ramp up a strong, healthy (down-sized) business later when labor costs and the cost of capital expenditures are lower.

About the Author

Photo of attorney Paul Deloughery

Attorney Paul Deloughery

Paul Deloughery is licensed to practice law in Arizona, and handles cases throughout the U.S. He is the founding attorney of Magellan Law, PLC. He helps financially successful people protect their assets from lawsuits, bankruptcy, divorce, IRS audits and government actions.

Contact him here to get help protecting your money in a divorce during a recession. Or just schedule a Bulletproof Your Assets Strategy Session.

About the author

Paul Deloughery