Sometimes when dividing maritial property in a divorce, there is no other way to equalize the settlement without one spouse making a promise to pay in the future. That’s when a property settlement note comes into play.
Generally, there is an agreed upon amount, an agreed-upon interest rate and an agreed upon period of time to pay. A property settlement note has some significant risks and drawbacks, however, including:
- If the agreement isn’t followed, it becomes another issue to fight over, possibly in court.
- What happens if the payor spouse doesn’t pay?
- Interest (but not the principal), on the note is taxable, thereby reducing the value of the total received, because the interest was being paid to compensate for the time value of the equalization payment being paid. Should the payor spouse pay these taxes or should the amount be adjusted to compensate for the taxes?
- If the note is unsecured, it would probably be discharged in bankruptcy.
- What happens if Mike dies or becomes disabled before the note is paid in full? That’s where disability and life insurance are important, but it’s an added cost and in some cases may not be possible.
- Income from a promissory note is often not included as income for purposes for qualifying for a mortgage or other loan, or at least not until a period of time passes before the lender sees the payments as being reliable.
A Certified Divorce Financial Analyst can help you negotiate and understand the value, including present value, of a settlement note. The actual settlement note should, however, be prepared by an attorney.