How Financial Forgiveness Can Impact Your Divorce

How Financial Forgiveness Can Impact Your Divorce

The financial devastation resulting from the COVID-19 pandemic spurred the development and implementation of several supportive programs under the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020. If you or your spouse benefited from any of these programs or provisions and are planning to divorce in 2021, be sure to discuss the potential impact with your accountant and attorney.

By way of one example, if you or your spouse own a business and took advantage of loans or other funds provided by the government, questions including whether the government funding should be treated as an income source for spousal or child support and which spouse should be liable for repayment of the loans need to be examined.

Paycheck Protection Program. Your or your spouse’s business may have received a loan through PPP, a program which provided some small businesses with loans that were, under certain circumstances, forgivable. If your or your spouse’s business received a PPP loan, be sure that all appropriate accounting measures have been taken to reflect how the loan funds were applied and what portion, if any, was forgiven or needs to be repaid.

Accurate accounting of how the loan was used is important because it can impact any joint tax filing, as well as how the loan should be treated in the appraisal of the business in connection with the divorce or, where the spouses agree to forego such an appraisal, how the parties apportion any repayment obligation.

SBA Economic Injury Disaster Loan (EIDL). The Small Business Administration has historically provided a variety of low-interest loans to help businesses during difficult times. The CARES Act expanded the EIDL and provided advances, loans and debt-relief provisions including loan forgiveness to support business owners during the pandemic.

If you or your spouse received proceeds from an EIDL, be aware of whether they were recorded in bookkeeping as an advance or a loan, and if a loan, whether the criteria were met to be forgiven. If you own a business and received proceeds from an EIDL, you should discuss with your family law attorney how your loan repayment obligations will reduce your income available to pay child and spousal support obligations.

Employee Retention Credit. The Employee Retention Credit may impact the value of your business in connection with a divorce or your income available to pay obligations resulting from your divorce. Consider the potential benefit you (or your business) will receive and the duration of such benefit. Be sure to consider that any impact this credit has on your financial circumstances is tied to the actual length of time you receive a benefit from the credit.

Expansion of Unemployment Coverage. The Pandemic Unemployment Assistance program expanded jobless benefits to gig workers, freelancers, independent contractors and self-employed workers affected by the pandemic, including providing an additional 13 weeks of payments to those who exhausted their regular state benefits. If you or your spouse received this type of aid, or failed to take advantage of this benefit, it should be presented as part of the total economic picture you present to the court, because it could influence support considerations.

Stimulus Checks. Stimulus checks should be considered when tallying income for purposes of calculating support or assets subject to distribution.

Federally Backed Mortgage Protections. Mortgage payments were able to be paused for up to 180 days if a borrower elected to take advantage of the program. There also was a moratorium on certain mortgage foreclosures which has most recently been extended to protect qualifying homeowners through June 2021 depending on the type of loan. It is important to document and present any information related to pausing mortgage payments as it may impact your financial circumstances with respect to apportioning the debt and determining actual expenses and support needs.

If you and/or your spouse decided to forgo your mortgage payments in order to pay more pressing expenses, that debt has accumulated and must be paid at some future date, depending on the specific requirements of your lender. If you are not able to manage repayment once these protections expire, you may have to consider foreclosure as part of your family’s future housing plans.

If you are able to repay the deferred debt, then you need to discuss what the source of funds will be and who holds responsibility. Also, if you were paying support to cover mortgage payments that were never made, consider negotiating that said amount should be grossed up and applied to the mortgage principal.

Student Loan Forbearance. The student loan suspension may be a consideration as you prepare cash flow and support analyses. If you have more cash available to pay support obligations due to the forbearance, consider an automatic decrease in your support obligations when you re-commence repayment of your student loans to account for the reduced cash flow.

Credit Protection. As you work out the details of your divorce, your credit report may be important, particularly if you are looking to secure a mortgage, get a car loan or otherwise work toward establishing your separate financial life. The CARES Act offers a provision protecting individuals whose payment status is current prior to the pandemic to request that any creditors not change their credit report status based on nonpayment during the pandemic. While this may not directly tie into your divorce negotiations, it is a good protection to explore.

Making sure the financial picture is clear and complete for you, your spouse and the court is critical to achieving a fair agreement.

Source = Forbes