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)?