Should you become your ex-spouse’s creditor?

You’re negotiating a separation or divorce agreement, and your spouse offers to pay you $X monthly for X years in exchange for your ownership interest in the house, retirement account, stock options or some other valuable asset. Should you accept your spouse’s offer? Should you become your ex-spouse’s creditor?

Before I share my thoughts, let me ask you some questions.

1. Do you own a bank?
2. Is it your business or habit to lend money?
3. Can your spouse borrow money from others?
4. Is your spouse reliable and trustworthy?
5. What’s your spouse’s credit score and history?
6. Are you prepared to go to court to enforce your agreement if your ex-spouse stops making payments?
7. If your spouse were to default (stop paying you), die or go bankrupt, will you be okay financially and psychologically if you never receive the payments?

Do you see where I’m going with this?

If you’re not a banker, gambler or financially sound, in my professional experience, it’s not a good idea to accept an offer of monthly payments instead of receiving a lump sum today.

It’s an especially bad idea to become your ex-spouse’s creditor if:

1. Your spouse has a history of bad behavior
2. Your spouse can or cannot borrow money from others
3. A payment plan places you at financial risk
4. Your spouse will be in a superior financial position

So, if your spouse asks you to accept monthly payments to equalize the division of assets and debts, what do you do? The list of considerations is long, but my top three suggestions are:

1. Make your financial security top priority
2. Speak at length and in detail with a trusted financial advisor and attorney
3. Don’t take unnecessary risks because of guilt or naivete

If after due diligence, good counsel, and careful consideration you decide to accept monthly payments, the advice I’ve given my clients is, make the deal as favorable and secure as possible. –If you’re going extend credit, act like a creditor.

Three ways I’ve helped my clients add layers of protection when accepting monthly payments are:

1. Establishing and including defined payment terms, penalties, and remedies in the Marital Settlement Agreement or Stipulated Judgment
2. Obtaining a promissory note and mortgage secured by a valuable tangible asset (i.e. the house)
3. Requiring a life insurance policy that the creditor spouse owns, identifies the creditor spouse as the sole beneficiary, insures the debtor spouse’s life, and in the event of the debtor spouse’s death, pays off the outstanding debt in full

Some lawyers and spouses say it isn’t necessary or it’s overkill to require the debt be secured with a mortgage because the family law judgment is enforceable. My response is if you’re putting your neck on the chopping block, don’t you want reinforced cables holding the blade and every escape hatch made available? Call me melodramatic, but in this instance, I say it’s simply good business sense.

In summary, through the eyes of a veteran family law lawyer, becoming your ex-spouse’s creditor is risky, and ultimately, it’s a decision for you to make with a trustworthy and skilled financial advisor. But if it’s inevitable or the choice you’re making, treat the transaction as though you’re a creditor, negotiate the best terms available to secure your investment, and make your terms a legally enforceable California family law order or Judgment. This will enable you to return to the family court if you have collection problems.