By Karen Covy
One of the scariest parts of getting divorced is wondering whether the person who once vowed to take care of you forever is now going to do everything in his/her power to leave you destitute. It would be great if getting divorced didn’t threaten your very existence. Sadly, we all know people who have been left financially devastated by an ex who seemed to be hell-bent on destroying them.
While your finances will definitely take a hit in your divorce, there are things you can do that will (hopefully) limit your financial destruction.
1. Get advice from a good divorce lawyer. You can’t make a fair deal with your spouse unless you know what the law provides. What’s more, while I am not a big fan of “lawyering up,” if your spouse just hired the best trial lawyer in town, you should probably do the same. Of course it would be best if you and your spouse could work out everything amicably. But if your spouse is determined to play dirty, getting a good lawyer will be the best investment you can make.
If you don’t care about the law, or you don’t want to bother taking the time or spend the money to understand your legal rights and responsibilities, then getting a fair deal will be a crap shoot. Maybe you will get a good deal, maybe you won’t. The problem is that, by the time you figure out you got screwed, it will likely be too late to change it.
2. Know your finances. Make sure you have current copies of all of your important financial documents. You need copies of your income tax returns, bank statements, and retirement account statements, among other things. You will not only need current information, but you will also have to get information from the past few years, too.
Knowing your finances doesn’t just mean having documents, though. It also includes reading those documents and knowing what things are worth. To know the value of certain items, you may have to seek outside help. For example, if you have a family business, you can’t know what it is worth unless you get it valued by a business evaluator. If you don’t want to do that, that’s fine. Just know then that whatever value you assign to the business is just an estimate. It may be wrong.
3. Know your debts. Make sure that, along with knowing about your assets, you also know about your debts. Run your credit report. That will help you make sure you didn’t accidentally forget about some debt. It will also tell you if there are debts in your name which you had no idea even existed before! (Better to know before you are divorced than after!)
You also need to make sure you understand how those debts will operate after your divorce. Credit card debt that is in your name will stay in your name until you pay it off, no matter what your divorce judgment states. That means that, even if your ex is ordered to pay the debt, if s/he does not make the required payments on time, your credit will be affected. The credit card company can also still come after you to pay the debt.
4. Understand how money works. It doesn’t matter whether you have never paid a bill in your life. You no longer have the luxury of ignorance. You must learn how to make and follow a budget. You must learn how retirement accounts work. You must understand the basics of life and health insurance. You must learn about any investments and real estate you own, including your home. You must understand divorce and money.
Learning about how money works may take you some time. If you and your spouse are both W2 wage earners and your only assets are a house and retirement account, learning about your finances, and how they work, will be relatively easy. On the other hand, if you or your spouse owns a business, or you have multiple pieces of property or complicated investments, learning about how your finances work may take more time and effort. Either way, do it. There are few better ways to spend your time right now.
5. Get help. If your financial situation is complicated, you may also want to consult with a financial planner, or a certified divorce financial planner. If you have to, pay them to educate you. It is not enough for them to understand your situation. You have to understand it. Remember, this is your life.
Getting help may also mean consulting with your accountant. If you are not comfortable talking to the accountant who has worked with you and your spouse in the past, then find another accountant to talk to. Ask the accountant about your taxes, past, present and future. Will you be taxed on the support you receive? Can you deduct the support that you pay? What kind of tax consequence will you suffer if you cash out a part of your retirement account early, or if you decide to sell the house now?
6. Don’t forget about taxes. Unless you understand the tax consequences of your property division you may be shocked to find out after your divorce that what you got in your divorce is really worth way less than you thought. You can cash out some of your assets (like money in a savings account) with no tax consequences. If you cash out other assets (like money in a retirement account) you will have to pay taxes and possibly even a penalty. In order to know the true value of the assets you are receiving in your divorce, you must figure in the tax implications associated with those assets.
The same thing is true about support. Child support is not taxable income to the receiving party. Maintenance/alimony is taxable income to the receiving party and tax deductible to the paying party. Understanding the differences is critical to knowing how much money you are able to spend, and how much you must save to pay your income taxes.
7. Negotiate with your head, not your heart. Making decisions out of guilt will cause you to give away too much. Making decisions out of anger will make you insist on getting too much. That may cause you to turn down a reasonable settlement offer and spend tons more money on legal fees — often without getting anything more than you could have settled for. Both extremes will result in you making a decision you will likely regret later.
You can’t make a good decision when you are so emotional you can’t think straight. Get yourself into therapy as soon as possible so you can start dealing with your emotions and clearing your head. While you do that, try to put off making as many important decisions as you can. If that is not possible, then get a trusted adviser (either your lawyer, a financial planner, or some other third party who deeply cares about you and understands finances and divorce) to counsel you about your decisions, and listen to what that person says.
8. Don’t cave in just because you want to be done. Divorce is a marathon, not a sprint. While most people want to believe that their divorce can be done quickly and amicably, in reality, getting to a point where you can divorce amicably takes time. It also involves some level of conflict from time to time. (After all, if you totally agreed with your spouse on everything, you probably wouldn’t be getting a divorce!)
Decisions made from exhaustion are usually just as bad as decisions made out of anger or guilt. So many people get worn down by the conflict of divorce that they end up giving away the store just because they want to move on. While there is nothing wrong with wanting to put your divorce behind you, caving in at the last second causes more regret than just about anything else in divorce.
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