Sunday, 20 October 2019

9 Financial Moves to Make Before a Divorce

9 Financial Moves to Make Before a Divorce
05 Jan
4:10
what happens to debt when you divorce
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When most people first decide they’d 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 — things like lawyer fees and selling one’s home — 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.

1. Take inventory of your finances.

One of the most important things you can do if you’re 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 they’re considering divorce.

“The first thing that I tell them is to account for all of their assets and all of their liabilities,” Pearson said. “Just knowing what you own and what you owe can be very, very valuable.”

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.

“I would organize your documents,” Nelson said. “When you file for divorce, there is a requirement that both parties complete an exchange — what’s called a financial disclosure statement. It’s a comprehensive document that’s signed under oath. And every county requires this.”

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.

“Just preparing these things and getting the documents together would be helpful,” Nelson said. “Because if I’m going to be asking for these, you’re just kind of wasting time, and it’s costing you more money if I’m constantly on you.”

2. Check your credit reports and credit score.

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.

“Let’s say the husband has never taken out a loan to buy a car, or has never taken [out] a loan to buy a house,” Pearson said. “If you don’t have some history, your credit score might be low.” 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 don’t have the credit history.

In addition, Pearson said going through divorce can affect your credit score. “There may be joint accounts that are going to be closed,” she said, which can negatively affect your score because you will lose the credit history. “When 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.”

Pearson adds that this step can be valuable because some spouses aren’t even aware that certain loans are in their name. “Some people might want to run a credit report and make sure there haven’t been credit cards or loans taken out in their name that they’re not aware of,” she said.

3. Figure out your spouse’s finances (if you don’t know them already).

Pearson said oftentimes, the people who meet with her are clueless about the finances in their marriage. “In most relationships, you usually have one spouse that handles the financial situation,” Pearson said. “Somewhere along the line, they’ve made the decision that, ‘OK, well you’re going to pay the bills, and you’re going to handle the investments.’”

Nelson said that in his opinion, one spouse not fully understanding the financial state of the marriage is actually quite common. “Sometimes, you have one spouse who is basically in control of all the finances,” Nelson said. “And the other spouse, they just have no clue.”

Some people might not even know their spouse’s salary or the amount of their monthly mortgage payment.

Leaving the finances to one spouse, however, can prove dangerous in divorce. “When this happens, the other spouse kind of loses touch with everything the other spouse is doing, so it’s very important to sit down and try to understand what the assets are,” 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. “If somebody doesn’t 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.”

Pearson also said it’s important to know where the cash flow is coming from in a marriage, which means understanding how much each spouse’s salary contributes to the overall household budget.

“If you’ve got a two-earner household, understand how much of the opposite spouse’s income is being used to run the household,” Pearson said. In addition, you should discern how you will be able to financially manage your own household post-divorce without your spouse’s income.

4. Decide what’s worth fighting for and be prepared for unexpected costs.

When considering what to fight for in a divorce, it’s 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 don’t consider is the cost of refinancing the home in one spouse’s 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 spouse’s name, it can be very expensive. “A lot of people don’t realize that has to happen,” 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 what’s actually worth it to you and your financial future.

5. Consider hiring a real estate agent specializing in divorce if you’re selling your home.

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.

“Moving and selling a house is just a very stressful period, so then when you overlay divorce on top of that, it’s a very volatile situation,” Evans said. “It can just send people over the edge, so I get it. I get where people are because I’ve been through it myself.”

Evans said it’s important to do your due diligence when selecting an agent.

“Interview your real estate agent carefully,” she said. “You shouldn’t be afraid to ask questions. Make sure your Realtor is asking you questions about what you’re trying to accomplish. Ask them if they’ve helped other divorced people because it is a very emotional segment.”

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. “You definitely want to go with somebody who’s experienced and empathetic,” Evans said. “People have got to understand what you’re going through and how to make it better.”

6. Be ready to have difficult financial conversations with your spouse.

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.

“Unfortunately, a lot of times people who are going through this situation, they’re not able to communicate, or they don’t talk,” Nelson said. “Well, then I have to reach out to the other attorney, and say, ‘Look, can you provide this or that?’ And every time I have to reach out to the other attorney, they’re both getting charged.”

Even though it might seem impossible in the moment, having difficult conversations will prove beneficial in the future. “If you’re just able to be cordial and communicate on a basic level, [it] would be helpful and minimize attorney’s fees,” Nelson said.

7. Meet with a financial adviser, if necessary.

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.

“You don’t 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,” Pearson said.

8. Think about where you might need to cut back financially following divorce.

Not only will the process of divorce be costly, but your finances will likely be drastically different.

“People fail to realize that after you’re divorced, essentially you’re dividing the income,” Nelson said. “And you have twice as many expenses because now you have two separate households.”

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?

9. Shop around for an attorney.

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.)\

“Do you feel comfortable?” he said. “It has to be a good fit. It has to be a good fit for the attorney, and for the client.”

Nelson said you shouldn’t be afraid to interview the attorney and ask specific questions. “Do they have experience? Do they know what they’re doing?”

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.

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Jamie Friedlander

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