As people contemplate seeking a divorce, emotions quickly become clouded. Spouses dread the inevitable confrontations that will arise. And they may not have the emotional clarity to give a long hard look at the financial impact.
I’ve known too many people that simply didn’t “want to deal” with the fraught financial issues. And they’ve often later regretted that they didn’t fight for what they deserve. Let’s take a closer look at the issues, and best ways to prepare yourself.
First, understand that family law attorneys are mostly focused on drawing up the paperwork. They don’t tend to analyze specific situations and identify the best strategies and demands for their clients. For that approach, you’ll likely need the expertise of a financial planner and/or a CPA.
The first question is the division of property. How do you divvy up the accumulated belongings of years of marriage? Our country’s nine community property states (AZ, CA, ID, LA, NE, NM, TX, WA, and WI) have laws that hold that all assets acquired during the marriage by either spouse are considered joint marital assets.
In other states, it’s up to the couples to make key property decisions, often through a system of bartering, as one spouse takes certain items in exchange for others. For example, the wife may take the car and furniture in exchange for the husband getting the boat. Another method used in the division of property is to sell the marital property and divide the proceeds equally. Seek out the help of mediators or arbitrators if you need.
You can find out more information about this on DivorceNet.com. Handling the negotiations on your own, through the site’s Q&A section, can help you avoid the expenses associated with professional advice.
Don’t forget that debts also need to be divvied up. You’ll need to make a very careful accounting of what you owe so you can avoid an unwelcome surprise after the divorce settlement is complete. Even if you fully trust your spouse, you should still order your joint credit report from each of the three credit reporting agencies. People have been known to run up debt without their spouse's knowledge, especially when they're contemplating leaving the marriage.
Also, make sure your debt isn’t increasing while you are in the process of getting divorced. For example, cancel most of your credit cards, leaving perhaps one to use for emergencies.
Legally, you are still responsible if your ex-spouse doesn't pay up, even if he or she signs an agreement taking responsibility for the debt.
Also, don’t ignore the tax Issues in divorce. Recent changes in the tax laws have altered how alimony and child support are accounted for. In a divorce that is finalized after 2018, alimony is no longer tax-deductible. And that’s changed the balance in how such after-marriage support is valued.
Lastly, you’ll need to assess how retirement plan assets are settled. If your spouse has retirement savings, you are probably entitled, by law, to half. This money can be used for your own retirement or for a down payment on a house, relocation expenses, or other current expenses. To avoid the 10% penalty on early withdrawal, be sure to follow IRS regulations.
When it comes to divorce, you want to “trust but verify.” Spouses may under-report income, ask an employer to delay a large bonus or salary increase, among other dishonest behaviors. Most vulnerable are those whose spouse owns a closely-held business. It’s important for both spouses to educate themselves about their joint finances so that nothing remains a secret to be overlooked.