Personal Finance: Financial Implications of a Divorce
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A divorce can be one of the most difficult experiences a person ever faces. The emotional impact ending a relationship is difficult enough, but the financial and lifestyle changes that result can be just as traumatic. For most people, divorce is the biggest financial transaction they ever face.
If you're reading this but not going through a divorce, continue reading. It shouldn't take a divorce before you take control of your finances. You may not be in the best emotional shape at that point to make the decisions you need to make. Make them now. Even if you never get divorced, you will be in a much better financial position.
If you are going through a divorce, you're not alone. Statistics suggest that nearly half of all marriages end up in divorce. During this difficult time, it's important that a couple cooperate to work out the financial aspect of the relationship.
Do You Need A Lawyer?
On the other hand, if both spouses are fairly amicable and willing to reach agreement, you may be able to divorce without litigation. If you and your spouse are able to agree, chances are good you'll be able to handle your divorce yourselves. You simply split your common assets, file the correct papers and go in front of a judge to tell him why you are divorcing. But rarely are divorces this simple. Splitting assets alone can be complicated. When you and your spouse can't agree on things together, instead of litigation, consider mediation or collaborative divorce, which helps the two of you work together with trained professionals to solve the problems of property division and custody arrangements. If you can't agree, litigation will become necessary. You definitely want a lawyer for any kind of litigation.
Even if you and your spouse are divorcing on very cordial terms, it can be hard to decide what's fair for both of you. A lawyer can be an advocate to help you make tough decisions.
Finding a good lawyer is important. You want someone you can trust in this rough period of your life to guide you through a very painful process. There is no specific time limit on how long the divorce process can last so choose a lawyer that you'll be comfortable with for a long time.
Don’t use the same lawyer that your spouse uses. Even though everyone involved may have good intentions, it can make for some very difficult situations. Ask recently divorced friends about their lawyers. If they had a good experience, you might want to interview that attorney. If you have worked with lawyers in other legal matters, ask them for a recommendation. Often lawyers know other lawyers outside of their own specialty.
No matter who recommended the lawyer you're considering, check his or her credentials and qualifications carefully. You're not looking for the cheapest lawyer you can find, you're looking for the best person to represent your interests in your divorce.
Divorce Legal Fees
A divorce can be costly if you hire a lawyer. And if it turns into a court battle, legal fees can get very expensive very quickly.
The biggest step in reducing legal fees is to do as much of the work as you can. Gather as much financial information as you can before you meet with an attorney. His or her hourly rate will be very expensive. You're paying that fee for legal expertise; you don't want to pay a lawyer to search through your finances. If you can, negotiate a fixed fee for your attorney. Otherwise, you can reduce fees by remaining actively involved in your case and following your lawyer's instructions carefully.
Try to settle small issues with your spouse without the help of a lawyer. Lots of tiny spats can lead to one gigantic legal bill. Save your money for the bigger battles that may take some greater legal muscle.
Don't try to use a divorce settlement to punish an ex. It will end up causing more stress, more pain and much more money in legal fees. Remain diligent to make sure the settlement is fair to you, but if you insist on "sticking it to your spouse" your lawyers will end up sticking it to both of you.
Find a way to communicate with your spouse. There is a lot of emotional stress involved with a divorce. There is most likely some anger involved as well. But if you each use lawyers to relay all communications between you, the fees will add up quickly.
Before a lawyer represents you, you will need to sign a written fee agreement. This is a legal document explaining the fees that your lawyer will charge. Make sure you understand this document and feel free to ask questions if you don't.
Splitting Assets and Debts
You need to know what you and your spouse are worth together and what you're worth on your own. It sounds like a big job but it comes down to a simple equation: Net Worth = Assets - Liabilities.
It does get a little more complicated. There are three categories of assets:
- Joint Assets These are accounts that you have built together including savings accounts, money market accounts, mutual funds or a co-owned business.
- Your Assets These are accounts that you opened before you were married and have been the only contributor to. Things that you owned before you married are also included in your assets.
- Spouse's Assets These are anything your spouse opened or owned before the marriage including assets inherited from family members.
Be sure to consider the future value of these assets. If you give up pension, for example, in exchange for keeping the house or up-front money, you may feel short-changed when you reach retirement age. A pension can be very valuable down the road.
You may need to appraise real estate, artwork and collectibles to determine their value. If you both own a business, you will need to value it to determine the amount needed to buy out the other spouse's share of the business.
Information You Will Need
- You and your spouse's paycheck stubs to show current income and withholdings
- You and your spouse's employee benefit statements
- Copies of all insurance policies including life, health, homeowners and auto
- Current statements for all bank and brokerage accounts
- Mutual fund statements
- Copy of the deed or lease agreement on your home
- Statements on all outstanding loans, including your mortgage and credit cards
- Employer stock option plans
- Copies of wills and trusts
- Copies of powers of attorney
- Receipts for major purchases
- A copy of your estate plan
- Copies of birth certificates and marriage licenses
Depending on what is being contested, you may also want to keep records for the following:
A prioritized list of assets you want to keep. Your children's records, including how much time you spend with them, the activities you do together, and the expenses associated with their upbringing.
Remember, if you have your finances in order, you won't have to pay a lawyer to discover this information.
Divorce and Home Ownership
A house is often seen as more than an asset. It's where you live. You may have put a lot of hard work into making the house feel like home. It can be a difficult choice to give that up during a divorce.
Make sure it makes financial sense for you to keep the house. You may have bought the house with two incomes and keeping up with payments on one income may be tough or even impossible. Think not only of the monthly mortgage payment but also of the insurance, repairs, maintenance, property taxes, utilities and other expenses for which you will be responsible.
To keep the house, you may be required to buy out your spouse's equity in the house, which is measured by the value of the house minus any mortgages owed on it. You might be able to "trade" assets. In other words, you would give up your half of some other assets you own jointly to pay for your spouse's half of the house. You may be able to refinance the mortgage for more than you currently owe and pay your spouse for your spouse's half of the house from the proceeds of the new mortgage.
Keeping the house, if you can, may provide you some stability in an unstable time. You may want to keep it to get you through the divorce and make decisions after you've had a chance to settle into your new situation in life. On the other hand, selling the house may set both you and your spouse free. You'll be able to make a clean break from your married life and start over.
As you can see there are a lot of things to consider in keeping a house. You need to make the decision that's right for you. Think about it very carefully.
In general, selling a house will put you in a better financial position, but not always. Consider how much you can sell it for, then subtract selling costs and the amount that is still owed on the mortgage. If you're selling and splitting the proceeds, you'll need to halve that amount. What you're left with must provide you with a solid financial base from which to find a new place to live and start your new, single life.
If your spouse will be keeping the house, make sure you obtain an appraisal if the value of the home is in question. Also, get accustomed to the fact that it will no longer be your house. It may seem like you're leaving the life you had while your spouse is still living in it. But even though the home may be the same physical structure, in reality, wherever either of you lives, your lives will be forever changed. Also consider how you will feel if your ex-spouse acquires a new mate who moves into your old home.
It may make sense to own the house jointly for an extended period after divorce. For example, Dad can agree to let Mom and the kids live in the house until the kids graduate from high school. As long as the divorce decree provides for Mom's exclusive use of the home, Dad will be able to exclude his share of the gain when the home is sold.
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