In the last installment of our continuing mediation case study series, Derek and Stacey completed their second divorce mediation session. There were a few tense moments, but with the help of their mediator, Ms. Smith, they were able to establish a temporary parenting schedule for their children. They arrive at mediation session number three ready to examine their assets and debts. After this they plan to look at their individual incomes and expenses going forward, and consider the impact of the New Jersey Child Support Guidelines.
At Ms. Smith’s suggestion, they begin by looking at the family home. As already discussed, Stacey purchased the home separately in the year 2000, about three years before the marriage. Further information reveals that she made an initial down-payment of $25,000 on a purchase price of $225,000, and then made mortgage payments on her own for the next three years, reducing the principal to approximately $193,000 by the time she and Derek married in 2003. Since that time, they have paid the mortgage with marital funds. The current remaining principal is about $130,000.
Derek and Stacey initially disagree on the value of the home both currently and at the time of their marriage. Fortunately however, their estimates are not too far apart, and with the mediator’s help, they quickly reach a compromise, setting the 2003 value at $255,000 and the current value at $330,000. They also agree that the home had probably appreciated to about $300,000 by 2005, and that due to real estate market fluctuations since then, the remaining increase to $330,000 can be attributed to home improvements made between 2007 and 2009. These improvements were paid for with marital funds, and Derek personally performed much of the labor.
“Great work so far,” Ms. Smith comments. “Now we need to figure out how much of the current home value to assign to each of you. Stacey, I know you had some strong opinions about this last session. Has anything changed since then?”
“Well,” Stacey begins, “I still believe that the home is my separate property. I agree though that Derek is entitled to get back half the value of the principal payments we made during the marriage.”
“Okay,” Derek replies, “And according to the attorney I spoke to after our last session, I’m also entitled to half of the increase in home value that resulted from the improvements to the house. Since we never refinanced and the house is still in Stacey’s name, she keeps the “passive” or “market” appreciation, but the work I put in resulted in “active” appreciation, so that part of the increase in value is marital property.”
“I haven’t asked my attorney about that,” Stacey responds, turning to the mediator. “Is he right? I mean, I guess does sound fair to me.”
“It sounds right to me,” Ms. Smith replies. “You can double-check with your attorney later, but if it seems fair to you, why don’t we work out the numbers on that basis now?”
Stacey nods assent. “I still want to keep the house. I know I will owe Derek something, but I’ve already looked into refinancing, and I should be able to get some cash out for him that way.”
“Okay, well let’s wait and see what that looks like after we talk about the other assets. According to my math, what we have for Stacey’s separate property portion of the home adds up to $170,000. That includes the net value at the time of marriage ($255,000 minus a mortgage principal of $193,000) plus the passive appreciation of $45,000 since the marriage. The marital property portion of the home value—which you are going to divide between you—would be $93,000. That includes $63,000 of mortgage principal paid during the marriage, plus the active appreciation of $30,000 since the marriage.”
Derek and Stacey both agree with these figures. “Great. Now what about Derek’s business?” asks Ms. Smith.
“We have a letter from our joint financial expert,” answers Derek. “It turns out that accounting practices are relatively easy to assess, so we agree with his analysis. The value is $85,000. That includes the car I drive, which is owned by the business, as well as the office equipment and furnishings I have in my home office, so when I move, I’ll take those things with me. And since I started the business while we were married, the full value is marital property.”
Ms. Smith congratulates Derek and Stacey on the compromises they have made in valuing these two major assets “This will save you time and expense moving forward,” she notes. “Now let’s look at the rest of your assets and your debts.”
The financial documents indicate $30,000 in joint savings and checking accounts. Stacey has a 401k with a current value of $100,000, and Derek has an SEP IRA worth $50,000, all accumulated during the marriage. The couple owns an SUV, usually driven by Stacey, with a current value of approximately $18,000 and an outstanding loan with a balance of $8,000. The documents also reveal approximately $40,000 of joint credit card debt and a balance of about $20,000 on a student loan that Stacey incurred prior to marriage while obtaining her MBA.
As Stacey and Derek begin to discuss their debts, the previously amicable tone grows tense.
“This is one of those things that really bothers me,” Stacey begins. “Derek brought over $35,000 of personal credit card debt into the marriage. I helped him pay that off, but he just kept spending. I really don’t think we would have all this new debt now if he hadn’t been buying things that we couldn’t afford. Why should I leave the marriage with half of that debt?
“Well Stacey,” Derek points out, “we also paid down your school loan with marital funds. The starting balance on that was at least $45,000. I won’t be getting anything out of you having that MBA anymore, so how is that fair?”
“Yes, but I will be taking the rest of that loan with me,” Stacey continues. “I think you should take the credit card debt with you.”
“That’s ridiculous,” says Derek. “You’re going to end up with most of the house value, and you also make a lot more money than I do. I’m not taking on extra debt. It’s joint debt, and I’m not even convinced that I was the only one doing all of the extra spending.”
“Are you kidding me?” Stacey responds, her voice rising. “You bought a pool table without even discussing it with me first! Your spending is completely out of control!”
“This seems like a good time for a break,” interjects Ms. Smith. “Let’s pick up this discussion again after we’ve all had a little time to clear our heads.”
Stacey and Derek are both relieved to take the break. In our next installment, we’ll see if they can get through the rest of the debt discussion and keep moving forward.
To read more about Derek and Stacey’s experience with mediation, find the beginning of the series here: Divorce Mediation up Close and Personal – Derek and Stacey, Part I.
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