I am a family law attorney, also known as a divorce lawyer, in the Rochester Hills area of Oakland County Michigan. I recently had a discussion with Mr. Robert Treat of QDRO Express regarding an interesting and novel way of using a Qualified Domestic Relations Order (QDRO) that he proposed.
Typically a QDRO is used to divide a qualified retirement plan when parties get divorced. Retirement plans, even though named or earned through the employment of one spouse, are considered marital property to be divided. Typically they are divided equally by the parties. In order to divide the plans, the court will enter a QDRO which then goes to the plan administrator who will then essentially create two separate accounts, one for the employee spouse, typically called the participant, and one for the other spouse, typically called the alternate payee.
May a court or a family law attorney use a QDRO to create a lien on the participant or alternate payee spouse's share of the retirement to enforce a financial obligation owed as a result of the divorce judgment?
The standard answer would be no, one cannot create a lien against a person's qualified retirement plan or benefits. However, that is not really true. In the case of a divorce the QDRO can be used in this manner to enforce such an obligation.
The best way to discuss this is probably to use an example. Say that a spouse is ordered to assume a credit card debt of $20,000 that is jointly titled in the name of both parties, call that spouse the “paying” spouse. The paying spouse is ordered to pay that within three (3) years of the divorce. However, given the lack of trust on the part of the other spouse (non-paying spouse), he or she is rather concerned that the other spouse will not pay the bill or file for bankruptcy. I know, hard to imagine that there is a lack of trust between parties going through a divorce.
If the paying spouse does not pay or files for bankruptcy, then the credit card company has the right to seek payment from the non-paying spouse and will probably sue the non-paying spouse for the balance of the debt, plus interest and attorney fees. The credit card company is not bound by the judgment of divorce and in the case of a bankruptcy the non-paying spouse may have no recourse against the paying spouse.
One innovative way to protect the non-paying spouse is to use a QDRO to create a lien against the paying spouse's share of the retirement accounts after it has been divided by the original QDRO. That is to say, first use a QDRO to split the retirement account into two separate accounts and then use a second QDRO (authorized by the judgment of divorce) to create a lien against the paying spouse's separate share of the original retirement account.
This can be done because the QDRO is issued incident to a divorce judgment or separation agreement and therefore it is an exception to the rule that one may not create a lien against such an account. The family law attorney, divorce lawyer, would have to indicate in the judgment that the non-paying spouse should have a lien against the paying spouse's share of the retirement accounts that may be accomplished through the use of a QDRO.
The language of the judgment and the QDRO should be specific. In this example, one would indicate that the non-paying spouse has a lien and security interest in the paying spouse's share of the retirement account to secure payment as well as any interest and penalties within three (3) years from the date of the judgment of divorce (use the actual date). This is the language that is the mechanism by which the lien is created.
If the paying spouse has not paid that amount in full within three (3) years, the non-paying spouse may request that the family law court issue an order that the paying spouse has defaulted and said order shall include the amount that is in default. It should indicate what the non-paying spouse must provide the court to obtain this order and that the court shall issue the order immediately upon this proof being provided to the court. The non-paying spouse then sends this order to the plan administrator and the plan transfers the proper amount to the non-paying spouse out of the paying spouse's share of the retirement benefits.
Finally, the judgment should contain a release clause for when the lien created by the QDRO will be released so that the paying spouse may start withdrawing funds from his or her share of the retirement accounts.
This approach works on many different levels. If the paying spouse files for bankruptcy, then most likely the lien will not be discharged in bankruptcy. The paying spouse cannot take a loan against the account in the meantime nor withdraw funds from the account. The non-paying spouse does not have to seek to collect from whatever remaining assets the paying spouse has left to indemnify the non-paying spouse for this debt. Finally, it streamlines the process for the non-paying spouse to obtain relief in these all too common situations. This can also be used to secure spousal support (alimony) payments, child support obligations or any other type of financial obligation that might be created in a judgment of divorce.