Divorced Woman’s Husband is Broke – Now What?

The following post is from Neal of WealthPilgrim.com. After reading the article, be sure to sign up for free at Wealth Pilgrim to receive more from Neal.

It seems like divorced couples still have problems even after the divorce.

That’s something I’m going to have to deal with next week. Here’s the story:

Mary & Harvey have been divorced for more than 15 years. Their split was amicable. Harvey was the principle support provider. Truth be told, Harvey was the only provider and Mary was grateful and lucky. In fact, they were both pretty lucky – that is until this morning.

Harvey is a high-priced advertising executive who was pulling down over $500,000 a year. Somehow he and his firm continued making the big bucks in 2008 and 2009 despite the economy. But reality finally caught up with them recently.

In late 2009, his firm cut Harvey’s salary by 50% and then by another 50% this morning. Harvey is still pulling in about $125,000 – and that is certainly a very nice check. But it’s a far cry from $500,000. And Harvey isn’t used to the reduced wage. He’s having difficulty making the support payments to Mary. And it gets worse.

He called asking her to sign off on the documents so he could take a loan against his 401(k) to pay taxes and credit card bills.

I’m not sharing this story because I think we should all go on a hunger strike in solidarity with the pain and suffering of all those who used to earn a half a million clams.

But I do have a great deal of empathy for this couple. Even though they make a lot more money than most of us, they face problems we all do.

Both Harvey and Mary made a number of mistakes for many years. Of course that doesn’t matter now and it won’t help them or anybody else.

Here are the steps I’m going to recommend when I meet with them:

1. Track expenses.

There is nothing more important than knowing what it costs you to live – especially if you are forced to make drastic cuts. I believe they have to write down everything they spend money on to make sure they know where to make those cuts.

2. Mary is going to have to find work.

If Harvey’s company had to make these kinds of cuts, the firm he works for might be on the ropes. That means there is the real possibility that Harvey is going to be out on the streets before long. At that point, Harvey won’t be able to give Mary any support. What is she going to do then? Loans and advances only go so far.

3. Don’t sign off on Harvey’s request to take a loan against the 401(K)

If Harvey doesn’t have the cash to pay the IRS and the credit card companies, that means he is still living way beyond his means. It also indicates that he’s not a great planner.

Theoretically, half of that 401(k) belongs to Mary but those IRS and credit card bills are 100% Harvey’s.

Finally, I don’t know what tax liability Mary takes on if Harvey is unable to repay those loans.

I’m more a fan of the couple finding a way to drastically cut their spending and find a payment plan for the IRS and credit card companies.

What have I missed? What other advice would you give Mary? If you were in her place, would you allow Harvey to borrow against the 401(k)?

Comments

  1. What other advice would you give Mary?

    Be sure to learn from the experience.

    Pain is not pointless. God puts pain in our lives as a teaching tool. Your life five years from today could be a better life than the one you enjoyed five years ago.

    It’s not my purpose here to minimize the pain. My aim is to urge emotional balance. The best news carries some bad hidden inside. The worst news carries some good hidden inside. Becoming able to perceive the good could be a big help in getting through the rough patch.

    Rob

  2. they’ve been divorced for 15 years and he is still paying for her? that’s ridiculous

    there’s no mention of children, so why should he be giving her money year on year?

    in a divorce the partner who has custody should get maintenance payments from the other party, but why would a husband or wife pay for their ex spouse? does the ex have no self respect?

  3. @No Debt Guy: “why someone making $500K a year would carry a credit card balance?” Simple, he was so used to making tons of money he gave little thought to “what happens if someday I’m not making this kind of money?” This happens as easily to big income earners as it does to people barely scraping by. Living beyond your means simply means you spend more than you make (i.e. borrowing on credit cards). He probably also rationalized it by all the ‘rewards’ he was getting from using his credit card, like so many do.
    Should he cash out his 401K? He will be in the top income tax bracket and will therefore pay that tax rate on any money he takes out, plus the standard IRS penalty. So he stands to lose about half his money if he cashes in today. Would you borrow at 50% to pay your debts? And if he decides to take a loan against his 401K to avoid the cash out, he will be in dire trouble if he does have to leave his company. At that point, the loan is due and he’ll have to scrape together and borrow to pay it off or he will get his with the taxes/early withdrawal penalty.
    Your advice is good, Neal. They both need to wake up to reality and trim lifestyle quickly. This is going to mean selling big houses, nice cars, boats, timeshares, etc. whatever else it is they have that was eating up this vast income. Credit cards need to be shut off against further charges, balances paid in full, and cards destroyed. No more borrowing. If this man and his ex had no payments, they could still live even on his reduced income without too many sacrifices. Written budget time. Every dollar spent on paper and on purpose. Do I sound like Ramsey? Yep. Would this guy and his ex be in good shape if they followed Ramsey’s advice? Yep.

  4. Well, I’ve been there. I am divorced, and was receiving child support and alimony per our agreement. I get alimony because I was a dependent spouse, having given up my career to follow my ex-husband out of the country and to raise our children. When my ex lost his job last year, the payments eventually stopped. While I have a job with benefits, the support payments are needed to make ends meet – raising two kids who need food, clothes, housing and the many other expenses associated with day to day life. It has been incredibly difficult to keep things together.

    My advice to any woman who may find herself in my shoes is to plan, plan, plan. Make sure that you set aside enough money for taxes on alimony payments. Make sure that you set aside an emergency fund. Treat your alimony payments like they are a salary that could be lost at any time. Have enough money to live on in case of loss of income. GET A JOB. Supplementing the alimony or other support payments is absolutely necessary, even if you only put that money in savings. So what if half of the ex-husband’s 401k is yours? Should you count on someone else’s investment taking care of you in your old age, or should you be earning, saving and planning for yourself?

    Don’t sign those papers! Once that money is taken out of the account, it may never be put back and the funds you are counting on in your later years will be gone forever. Take a hard line on that, then go out and find a job, even if it’s just answering the phones somewhere. Take care of yourself, no one will do it for you.

  5. All I can say is what is done, is done. You can’t take the last 15 years back or anything else, so who cares. Today is today and do what you want with the 401k. It is your life.

    Personally I wouldn’t sign the papers, because like a few have said, once that money is gone it is gone. It takes a long, long time to build back up. I wouldn’t want to be broke and living on the streets when I was in my retirement years. It is a lot harder to be poor in old age, then it is when you are younger.

  6. Is Harvey still paying his ex-wife the same amount as before the 75% cut in pay? I think I would get that alimony amount reduced if my income was cut by 75% if I were him…

    Yeah, in these days and age, I can’t believe that a divorced woman (with out kids mind you) would not try to go out and get a job much much earlier! I have to wonder how much she was getting in alimony support…

    Is Harvey single or did he get a new wife? If so, it must be horrible for her too!

    Tough story! I feel for the guy from a self-confidence standpoint.

  7. I am heartless and cruel, very unsympathetic towards these two people.However you Neal wrote advice that was perfect and shows how well you must do as a financial planner you left emotion and personal feelings out of it and I agreed with all your recommendations that I thought were right on the money.If they heed your advice they will probably do just fine except be in shock at a new lifestyle.If they ignore your advice things will get very bad very quickly.I am betting they have no idea how the average person lives on a low salary maybe even with no benefits.

  8. I don’t think it’s heartless and cruel to think that after 15 years of paying Mary to do nothing, Patrick might be entitled to a little bit of relief from this outdated obligation.

    This divorce stuff is decades out of date.

  9. I’m not understanding why ex-wife is entitled to anything from her ex-husband’s 401K? The division of assets would have been taken care of in the divorce settlement 15 years ago. If this asset wasn’t distributed as part of the divorce settlement, then it should be distributed NOW!

    There’s no mention of children, and I’m not sure if that was omitted, or there aren’t any kids. We also don’t know how old the ex’s are.

    My ex-husband paid child support for our two children until they were 18 years old. The court lumped our two salaries together and then determined what the kids “bracket” would be. My salary was 75% of the total, my ex’s was 25%. So, my ex paid 25% of the total support to me as I had custodial care of the kids. When he lost his job, he could have had the situation re-evaluated. We did go back to court to dissolve the child support order when the kids were over 18.
    They still live with me so I’M going to move next year to bump them from the nest. They’re 25 & 23 and it’s time for them to make their own way in this crazy world. They will both have graduated from college at that point and I’ll give the new grad a couple of months to find a job before I pull the house out from under them.

    MOTHER OF THE YEAR!!!!

  10. To those who called Mary a moocher:
    Are you personal friends of the ex-couple? Did you know the terms they agreed to in their marriage?

    If not, stop judging and labeling.

    Women routinely perform work in the home that, if a husband were to hire someone, would equal a hefty sum. So most likely Mary and other divorced women who worked IN THE HOME, were unpaid workers for many years.

    That alimony is often compensation for that unpaid work.

    Not saying this applies to all cases.

    However, there is no reason for anyone commenting here, who has no real insight into the nature of this relationship and the terms of the divorce to judge.

    Not really your business.

    I’ve had to watch the painful breakups of several friends. Each and every woman, for various reasons, got royally messed up by their ex-husbands. None of them received alimony (even though several had been forced, yes, you heard me, forced by their husbands, to stay home when they wanted to work) and several of the husbands did not pay child support as mandated.

    Do some women abuse alimony? Absolutely. But not in all cases. In many cases, women leave a marriage with no resources having delivered what amounts to years of unpaid work.

    If a man expects his then-wife to stay home and raise children, maintain his social life, maintain the home, etc. as so many former wives did, a lot of work with NO pay (room and board is not pay, folks), then he has to compensate her for that work.

    The ex-wife of a very high profile CEO type won a huge settlement years ago because the court ruled, rightly IMHO, that the “services” she delivered (she held parties, managed their home and maintained relationships on behalf of this guy that allowed him to advance in his career)contributed to his success in his career.

    In “real” life, where people don’t make $500,000, these issues are even more problematic.

    People with years of experience can’t get work today. How is an older woman with no skills supposed to support herself?

    To me, a divorce settlement should take into account the services rendered and also provide funding for someone to get job training, where at all feasible.

    For me and others, the way to avoid all this is simple: Do not get married.

    Personally, I don’t think that any woman should ever give up her financial independence to anyone, let alone a husband. But I respect that for some women, staying home and raising children is a choice and as such should be regarded as the important work it is.

    If a spouse had to hire someone to caretake a home, raise children, etc., it would cost a pretty penny.

    By the way, I believe all of this applies to both male and female spouses. Today, there have been many men who stayed home to raise kids, etc. and they, too need compensation should a divorce ensue to compensate for their services.

    and yes, every marriage contract is indeed different. So this is not me saying every spouse has a right to claim alimony. I don’t believe that at all, but there are times when it is the “right” thing to do and financially justified.

  11. It is very interesting the way we have all drawn conclusions. As it happens, Harvey is just really generous. They’ve come to this understand and it’s worked for many years…just not right now.

    Now sure if Mary approaches her ex w/any attitude…..it’s just what they’ve worked out.

  12. My sister and brother in law seperated- her choice. He paid for her lifestyle for two years until they reconciled. He thought it was fair since they did not do the divorce (expensive) and they were very good friends. Lucky she was.
    My brother and his wife are divorcing- her decision. WHAT A MISTAKE FOR HER! She thinks the court will give her lots of money. They are broke (high lifestyle). She now makes more money than him. He is attempting to save them financially (selling cars, cutting back). She does not get it. I think she has a long road….
    Neal, your comments are spot on! My brother did the spending tracking for the last three months and was outraged at how much out of control their life had become. Looks pretty on the outside – stinks on the inside.
    I picked up that Harvey is generous. Maybe, looking at the books, they may even consider sharing a house again. It is possible if neither has another spouse.
    I am unsure that Mary can find work if she hasn’t done much in years…suggest she look at the volunteer work that she did in the past to find a direction.
    DO NOT sign over that 401- it is their insurance! This is a bump in the road (large as it may be). There is hope on the other side. The 401 cannot be taken by creditors (not sure about IRS),

    BTW- I know LOTS of people (several men – lots of women) who own a part of the spouse’s 401 or IRA. It is a normal thing if one was funded and the other was not.
    Even the government does not permit a “non working” spouse to put away much money. As a mom who has returned to work- I will be looking to my husband’s pension if anything happens to our marriage.I did not gain the senority because I was caring for children or moving our household for his job. HE knows that. But, we plan to be together for “till death us do part”. Again, old fashioned.

  13. I am a woman who thinks it is crazy that people should have to pay a spouse 15 years after a divorce, regardless of the circumstances..but, perhaps things like this will cause people to think a little more before getting married! Time and time again I have watched my friends put little thought into choosing a spouse…marriage is a big deal folks, make sure the person you split assets with and even more important, have kids with, is not a LOSER!

  14. Over 20 years ago I was talking to a man that was on wife #3 and the conversation turned to life insurance. He stated that he did not pay anything to his ex wives nor have life insurance to provide for the current wife because they had a built in money making machine (whatever that is :) ). In this day and age with the equality that women demanded in the 60′s (40 years ago at least) there should be no alimony. Perhaps enough for a few years for them to snare another spouse or get on their feet, but 15 years! Forgetaboutit!

  15. I’d urge everyone to generate earned income just for the Social Security benefits, even if you live primarily on alimony.

    My mom was diagnosed with dementia a decade after her divorce.

    Because she lived on alimony and had no earned income she was not eligible for Social Security disability (SSDI)

    A big benefit is after 24 months those on SSDI qualify for Medicare coverage – that would have helped cover the tens of thousands she paid out of pocket over the decade-long course of her illness.

    You only have to generate 2 credits a year (out of 4 possible) to remain eligible for SSDI.

  16. i have no sympathy for this couple. 500K a year and the ex-wife blew her slab of the money on what? she never saved any of her share? she never did anything career-wise to prepare for an emergency? absolutely no tears for them.

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