When most people first decide theyâd like to file for divorce, the minutiae of their finances might not be top of mind. The psychological burden of a marriage ending can be all-consuming, making it difficult to consider any practical matters.
Plus, the costs associated with divorce â things like lawyer fees and selling oneâs home â can be so complicated and overwhelming that people put off thinking about them. But making certain financial decisions prior to filing for divorce can ensure you emerge from the tumultuous process with solid financial footing.
Before filing for divorce, consider making these financial moves.
One of the most important things you can do if youâre considering divorce is taking a comprehensive look at your finances. This includes things like your salary, any loans you have in your name, the amount you have in your bank accounts, credit card balances, retirement accounts, insurance policies, etc.
Diane Pearson, a certified divorce financial analyst and wealth adviser at Legend Financial Advisors in Pittsburgh, said oftentimes, clients come to her firm before even telling their spouse theyâre considering divorce.
âThe first thing that I tell them is to account for all of their assets and all of their liabilities,â Pearson said. âJust knowing what you own and what you owe can be very, very valuable.â
Patrick Nelson, a divorce attorney at Casey Nelson, LLP in the Chicagoland area, said organization is crucial when preparing for divorce, in particular, because you will need to sign a financial disclosure statement.
âI would organize your documents,â Nelson said. âWhen you file for divorce, there is a requirement that both parties complete an exchange â whatâs called a financial disclosure statement. Itâs a comprehensive document thatâs signed under oath. And every county requires this.â
Nelson said in addition to a complete disclosure of assets and income, clients have to provide supporting documents, which generally includes three years of tax returns.
âJust preparing these things and getting the documents together would be helpful,â Nelson said. âBecause if Iâm going to be asking for these, youâre just kind of wasting time, and itâs costing you more money if Iâm constantly on you.â
Pearson and Nelson both advise people who are considering filing for divorce to check their credit reports and credit score. Take a look at your credit history, and understand what your score means. This step is particularly crucial if you left most of the finances in your marriage to your spouse.
âLetâs say the husband has never taken out a loan to buy a car, or has never taken [out] a loan to buy a house,â Pearson said. âIf you donât have some history, your credit score might be low.â This means that if you try to purchase a house or a car post-divorce, for example, you might not get approved in a favorable manner, Pearson said, because you donât have the credit history.
In addition, Pearson said going through divorce can affect your credit score. âThere may be joint accounts that are going to be closed,â she said, which can negatively affect your score because you will lose the credit history. âWhen you remove the history of a mortgage, or the history of a car loan, or things that were in joint name, it actually can send the credit score downward, just because history is what helped build that credit score.â
Pearson adds that this step can be valuable because some spouses arenât even aware that certain loans are in their name. âSome people might want to run a credit report and make sure there havenât been credit cards or loans taken out in their name that theyâre not aware of,â she said.
Pearson said oftentimes, the people who meet with her are clueless about the finances in their marriage. âIn most relationships, you usually have one spouse that handles the financial situation,â Pearson said. âSomewhere along the line, theyâve made the decision that, âOK, well youâre going to pay the bills, and youâre going to handle the investments.ââ
Nelson said that in his opinion, one spouse not fully understanding the financial state of the marriage is actually quite common. âSometimes, you have one spouse who is basically in control of all the finances,â Nelson said. âAnd the other spouse, they just have no clue.â
Some people might not even know their spouseâs salary or the amount of their monthly mortgage payment.
Leaving the finances to one spouse, however, can prove dangerous in divorce. âWhen this happens, the other spouse kind of loses touch with everything the other spouse is doing, so itâs very important to sit down and try to understand what the assets are,â Pearson said.
This is one of the first things she discusses with her clients who are considering divorce, because someone needs to fully understand what has value before deciding what to fight for. âIf somebody doesnât have any financial history or background, what we try to do is help them understand what those assets are because having a checking account is extremely different than having a retirement plan.â
Pearson also said itâs important to know where the cash flow is coming from in a marriage, which means understanding how much each spouseâs salary contributes to the overall household budget.
âIf youâve got a two-earner household, understand how much of the opposite spouseâs income is being used to run the household,â Pearson said. In addition, you should discern how you will be able to financially manage your own household post-divorce without your spouseâs income.
When considering what to fight for in a divorce, itâs important to think beyond just the face (or emotional) value of an asset. Consider the potential tax liabilities, too. For example, if one spouse keeps the house, that spouse will also have to keep the mortgage.
Another unexpected expense people donât consider is the cost of refinancing the home in one spouseâs name. Pearson said clients are often surprised to discover that when one spouse keeps the house and the mortgage has to be refinanced in that spouseâs name, it can be very expensive. âA lot of people donât realize that has to happen,â she said.
Perhaps another asset, like a car that is already paid off, would be more valuable to you. Instead of getting wrapped up in what you think you should fight for, consider whatâs actually worth it to you and your financial future.
Selling a home during a divorce can be a stressful experience for many reasons, including a quicker timeline and, if the couple has kids, the need to move children seamlessly. Pam Evans, an associate broker at Century 21 Results in the Atlanta metro area, often works with clients going through divorce. Working with a real estate agent who has worked with other clients going through divorce can offer a welcome perspective.
âMoving and selling a house is just a very stressful period, so then when you overlay divorce on top of that, itâs a very volatile situation,â Evans said. âIt can just send people over the edge, so I get it. I get where people are because Iâve been through it myself.â
Evans said itâs important to do your due diligence when selecting an agent.
âInterview your real estate agent carefully,â she said. âYou shouldnât be afraid to ask questions. Make sure your Realtor is asking you questions about what youâre trying to accomplish. Ask them if theyâve helped other divorced people because it is a very emotional segment.â
Even though it can be tempting to work with a family member or friend who is a new and affordable agent, you should opt for experience over all else, as the home is one of the biggest assets in a divorce. âYou definitely want to go with somebody whoâs experienced and empathetic,â Evans said. âPeople have got to understand what youâre going through and how to make it better.â
Nelson said communication is crucial during divorce proceedings. Many couples find it difficult to speak during this time, but doing so could save you both stress and money.
âUnfortunately, a lot of times people who are going through this situation, theyâre not able to communicate, or they donât talk,â Nelson said. âWell, then I have to reach out to the other attorney, and say, âLook, can you provide this or that?â And every time I have to reach out to the other attorney, theyâre both getting charged.â
Even though it might seem impossible in the moment, having difficult conversations will prove beneficial in the future. âIf youâre just able to be cordial and communicate on a basic level, [it] would be helpful and minimize attorneyâs fees,â Nelson said.
As a financial analyst who specializes in helping people going through a divorce, Pearson said it can always be worthwhile to consult a financial adviser. A financial adviser or even a nonprofit credit counselor can help you get a complete financial picture, which includes your assets, liabilities, income and expenses.
âYou donât have to hire somebody to do that, but if you yourself can do it, those four areas need to be addressed before you even move forward,â Pearson said.
Not only will the process of divorce be costly, but your finances will likely be drastically different.
âPeople fail to realize that after youâre divorced, essentially youâre dividing the income,â Nelson said. âAnd you have twice as many expenses because now you have two separate households.â
Prepare yourself by thinking about where you might be able to cut back following divorce. How can you begin saving now? What could you live without post-divorce?
Nelson recommends doing your due diligence when searching for an attorney to represent you in a divorce. Nelson advises meeting with the attorney in person for a consultation and gauging how you feel. (Oftentimes, these consultations are free.)\
âDo you feel comfortable?â he said. âIt has to be a good fit. It has to be a good fit for the attorney, and for the client.â
Nelson said you shouldnât be afraid to interview the attorney and ask specific questions. âDo they have experience? Do they know what theyâre doing?â
Divorce can be a difficult, emotional time fraught with obstacles and roadblocks. Getting your finances in order prior a divorce can be one way to make the process less stressful. And in an unpredictable time, having a clear understanding of your financial picture can help you feel empowered and in control.