Get With The Plan: May 26, 2013

52613Oscar reached out to Get With The Plan after reading a column about a divorced woman who was in financial trouble. Oscar, who divorced in 2012, is in trouble, too.

He said his personal situation made it hard for him to empathize with the profiled reader.

“I incur approximately $2,000 in credit card debt each month,” he said. “The lawyers and my wife took 100 percent of my pension, IRA and SEP plans and the money reserved for college for my kids, and the house was liquidated with proceeds to her and her lawyers.”

He says he’d never be able to retire. We offered to try to help.

Oscar, 53, says his goal is to have less than $100,000 in credit card debt at the end this year.

After negotiations for his divorce settlement, Oscar says he was left paying more than half his income to his ex.

“After payments to her I am left with less than $2,500 per month to pay my living expenses,” he says. “And one kid lives with me full time and the other, three days per week. There is no way I can cut my expenses enough to not incur debt.”

He said his ex has asked the court to order Oscar to pay the entire cost of college for the two children, and based on his experiences, he says he expects a ruling in her favor.

Oscar, whose name has been changed, has $900 in an IRA, $42 in his checking account and $9,000 for college in his child’s name.

The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Fairfield, to help Oscar get through this difficult financial time.

Lynch says financial planning after a divorce can be rather complex because of the divorce agreement signed by both sides.

“If you have been married for a significant amount of time, you have the potential to have alimony payments for life or until the other party remarries,” he says. “Alimony can be reviewed if the spouse is living with another person — similar to marriage — or when the payor spouse hits normal retirement age and retires.”

Lynch says getting back on track after a divorce is a very difficult task, and it requires some difficult choices,

To start, Lynch says Oscar should sit with his divorce attorney and make sure he understands what his options are, and what could potentially get him into trouble.
Because of the alimony payments, Oscar is heading into debt fast, adding $1,500 to $2,000 per month to his debt.

“Bottom line is that the numbers are not sustainable,” Lynch says. “His credit limits will be maxed out, he will have $100,000 in credit card debt costing him $20,000 per year in non-deductible debt. This is like watching a train wreck.”

Lynch says the only options are to cut his expenses and increase his income.

“Nothing is sacred,” he says.

On the positive side, Oscar’s child who is still in high school got a scholarship to a private college, so tuition will only cost $9,000 per year. The child who is already in college attends a county college, which has significantly lower tuition.

“When you are in this situation, it is very important that you swallow your pride and really look at the numbers,” Lynch says.

Adding additional college debt at this time is not an option, he says.

Lynch says for the child already in college, the tuition cost is $134.50 per credit. Assuming 18 credits per semester, the cost is less than $2,500 per semester.

“It appears that the parties in this case will have tremendous difficulty contributing to college even though the college costs are reasonable,” Lunch says. “Their children will need to apply for financial aid to assist in the costs associated with college.”

He says for most divorcing couples, paying for college is an emotional issue. One of the biggest mistakes divorcing parents make is allowing their children to attend colleges they cannot afford, which results in them having insufficient funds for their own retirement, he says.

“Parents who are divorced have a very hard time telling their child that they cannot go to the college of their choice due to cost because they feel as if their child has already been through so much due to the divorce,” Lynch says.

For extra help, Lynch turned to Robin Bogan, a family law specialist at Pallarino & Bogan in Morristown.

Bogan says family courts in New Jersey favor the stability of agreements. Unless there are significant extenuating circumstances, a court will not disturb a property settlement and support agreement reached by the parties within the first few years.

“If the ink is barely dry, a court will typically enforce the agreement the parties reached,” he says.

For a court to review alimony. Bogan said a “significant change of circumstance” is needed. This could be a big increase or decrease in income for the payor or the payee.

If Oscar has considered bankruptcy, he may want to reconsider.

“Alimony and child support are not dischargeable,” he said. “In fact, it may hurt him. If parts of his expenses are eliminated, he may have more money for child support or alimony.”

On the college cost issue, Bogan said the courts have 12 factors that are considered to determine how college costs are split between spouses. In New Jersey, he said, it is the child’s right to have his or her parents contribute to college and related expenses.

“He should consult with his attorney to determine how to minimize his contribution given his alimony and child support obligations, lack of savings and incredible debt,” Bogan says.

So where does Oscar go from here? First, he has to stop the bleeding. Lynch says he has to get back to at least a neutral cash flow and start paying down the debt he’s accumulated. No expense should be off the table.

Next, Lynch says Oscar must earn more. He has his own business, so he needs to “work harder and make more money and/or cut expenses.”

He could save money by changing health insurance plans and working with his business deductions. But, Lynch says: “Don’t be stupid.”

“A forensic accountant can come through your books rather fast and see expenses that are not legitimate, and negate them from your business expenses,” he says. “They can spot an increase in ‘entertainment expenses’ or anything that is substantially larger than what the expenses were prior to the divorce.”

“Legitimate business expenses are fine. Just don’t go crazy,’” he says.