Rules for Selling Marital Assets During Divorce

Selling marital assets during a divorce is ill-advised. Generally, you should not sell marital assets during a divorce, particularly without consulting with your divorce attorney, first. The amount of problems that the sale of an asset can cause far surpasses any benefit to be realized. As a result, the number one rule for selling marital property during a divorce is, simply, don’t do it. However, it is not always avoidable. Here are some things to consider if you absolutely have to sell marital property during a divorce.

Considerations When Selling Marital Assets During a Divorce

Avoid Dissipation

First and foremost, know and understand that being accused of “dissipating the marital estate” is a possibility. If you dispose of or sell a marital asset and you cannot account for what happened to the proceeds, or for the new property you received in exchange for said asset, watch out.

If the sale was not done in a way that comports with the usual and customary way you would sell marital property while you were married, your soon-to-be ex-spouse might allege that you sold the property solely for the purpose of devaluing or wasting the marital estate.

For example, let’s say you have a lake house that was purchased during the marriage, and you can no longer afford the upkeep for said property. Let’s say it has a fair market value of $500,000 and a mortgage of $350,000. That means that there is a net equity of approximately $150,000 to be realized upon the sale of said property at fair market value, after reducing out the mortgage bank’s balance due, give or take some additional fees.

Now, let’s say that you decide that you are going to sell the property to your brother for $375,000, to get rid of it. That means that through this sale, you only realized $25,000 in net equity after the mortgage was paid, but if the property were sold at fair market value, you should have received approximately $150,000 in net equity after the mortgage is paid. Your sale came up $125,000 short. Your spouse can tell the court that you “wasted” or “dissipated” a marital asset because you undersold it, and that you should be required to pay back to the marital estate a portion of the $125,000 that you were “short”.

Now, this example is a bit far-fetched because it presumes a spouse could sell a piece of real estate without obtaining any sort of homestead waiver or signatures of their spouse, however, it illustrates the concern. Dissipation allegations are possible, and you could be forced to repay back into he marital estate the money that was lost.

Property that is No Longer Functioning

If the property has no use because it is no longer functioning, that is a little bit of a different situation, as you may be able to defend the disposition of the asset if dissipation is alleged. For example, let’s say you are driving a car which is twenty years old and it stops running. Let’s say the fair market value of the car is $3,000 and it requires repairs of $10,000 in order to run. It seems likely that paying for the repairs on the car would be wasteful, because the car’s fair market value doesn’t exceed what you could sell it for after the repairs are made and you’d be sinking $10,000 into it to make it run. This is one of those scenarios where selling the property or “junking it” or donating it might make some financial sense. And, if you need transportation for work, you may need to purchase a new vehicle. If the sale of the asset could be arguably due to the fact that the cost to repair the vehicle exceeds the proceeds from the asset, that would be an argument you could make in defense of a dissipation claim. When someone is alleged to have committed dissipation, the person being alleged needs to be able to account for what happened to funds or explain why it was not, in fact, dissipation of the marital estate. So, this is a scenario where an argument could be made supporting the actions.

Best Practices for Selling Marital Property During the Divorce Process

There are “best practices” for selling marital property while divorcing, to try and ensure that no complications occur as a result of the sale.

Notice and Prior Approval

First and foremost, it makes sense to try and give notice and obtain approval prior to selling a marital asset, by notifying your spouse or their attorney of your intentions. If the sale is going to net in a large amount of proceeds, the attorneys may suggest the funds be placed into one of the attorney’s IOLTA (trust) accounts during the pendency of the case so that the funds are available to be divided between the parties in a final settlement or after a trial. This ensures that the funds are preserved. It also protects the parties from alleging claims of dissipation against one another.

Agreed-Upon Court Order

Another way to handle the sale of property is to reduce it to an agreed-upon court order indicating what will be sold and for how much. We see this often during the pendency of divorce cases with real estate. Parties may know they need to sell the marital residence and may wish to start the sale process before the divorce is finalized. This is fine, so long as the parties agree. Details should be worked out through your divorce attorneys, such as who will pay the mortgage, taxes, insurance, and other expenses during the sale, what the list price will be, who the realtor will be, and other items that are pertinent to a sale. This is not uncommon in divorce cases.

However, it is best practice to ensure there is an agreement, in writing, and ideally, reduced to a court order, so no one can later allege they didn’t agree or did not know. If all terms are agreed, the parties can sign off on it and submit it to the Court for entry and approval. This makes a clear record of what everyone can expect and it absolves the parties from allegations of dissipation later on.

When you are in the process of getting a divorce, it is best to consult with your attorney before selling any property that was acquired during the marriage. Taking this course of action is going to be the most effective method for ensuring that you do not experience problems in the future when it will be too late to fix them.

THIS ARTICLE WAS PREVIOUSLY PUBLISHED AT: https://illinoislawforyou.com/blog/rules-for-selling-marital-assets-during-divorce/