What Is Asset Dissipation?

by Cam Merritt, Demand Media

    "Dissipation" can mean something getting scattered or evaporating -- or it can mean something being wasted or squandered. If you ever find yourself being grilled about "asset dissipation" by a lawyer, a tax auditor or your spouse, it's the latter meaning of the word that applies. In most contexts, asset dissipation refers to intentionally using up or wasting assets. However, the term also applies to specific type of loan.

    Divorce Cases

    Contested divorce cases -- those that wind up in court because the sides can't come to an agreement -- often include charges of asset dissipation. Say a man has not only been cheating on his wife but has also been paying his girlfriend's rent, buying her gifts and taking her on vacations. The money spent on the girlfriend reduces the marital assets, so from the wife's point of view, the husband has been engaged in asset dissipation. Similarly, one spouse could charge that the other has been dissipating the couple's assets through such things as gambling, drug use or excessive spending on travel or personal care.

    Compensation

    When it comes time to divvy up the marital assets in the divorce, the spouse "wronged" by the dissipation may demand some kind of compensation. Take the example of the husband carrying on an expensive affair. Say that the total amount he spent on the girlfriend was $100,000, and that by the time they get to divorce court, the couple has $600,000 worth of assets. An even split of $600,000 would be $300,000 apiece. But the wife says that the marital assets should actually be $700,000 -- the current $600,000 plus the $100,000 he spent on his girlfriend. She says she's entitled to half of that amount, or $350,000. He "gets" $350,000, too, except that he's already spent $100,000 of his share, so he walks away with $250,000. Of course, these figures would adjust if the divorcing couple were splitting the marital assets on some percentage other than 50-50, but the principle is the same.

    Tax Cases

    The concept of asset dissipation also arises when people who owe a lot of money for back taxes and penalties try to have that debt reduced. If a taxpayer doesn't have enough money to pay her tax debt, and if it's likely that she won't have enough for the foreseeable future, the Internal Revenue Service may allow her to settle the debt for a smaller amount. That amount depends on her current financial condition, particularly her income and assets. The IRS will examine her finances closely. If it finds evidence that she has been using up assets that could have been used to pay the tax debt -- if she has been engaged in asset dissipation, in other words -- it will increase the settlement amount she has to pay.

    Asset-Dissipation Loan

    In an entirely different context, "asset dissipation" refers to a type of loan. Before people can get any loan, they usually have to show some evidence that they can pay it back. For the typical mortgage or car loan, that means having a job or some other source of steady income. The maximum amount someone can borrow is dictated by the amount her income will allow her to repay. With an asset-dissipation loan, though, the borrower's assets are considered her "income." To make the loan payments, it's assumed that she will sell off or cash in her assets. The maximum amount she can borrow depends on the total value of her assets and how long it would take to fully dissipate those assets.

    About the Author

    Cam Merritt has been a professional writer and editor since 1992, specializing in articles about spectator sports, personal finance and law. He has contributed to "USA Today," "The Des Moines Register" and the "Better Homes and Gardens" family of magazines and websites. Merritt has a Bachelor of Arts in journalism from Drake University.