Life Events Guides - Divorce

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. About half of all marriages end up in divorce. That doesn't make it any easier.

It's time to clean house and reorganize. If your spouse has been taking care of the money, now is the time to take control of your own finances.

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.

Do you need a lawyer?
Since lawyer fees are usually the biggest expense of a divorce, if you can do without a lawyer, or settle your divorce through mediation, you most definitely want to. But only do so if you're absolutely sure you don't need one.

Is your divorce a simple one, with both spouses fairly amicable and willing to reach agreement? Or will you need 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, in some states, 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.

Reducing legal fees
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.

Stick to the tasks at hand with your lawyer. As you work with a lawyer, you'll probably build trust with that person and it might be tempting to "unload" some of your feelings on him or her. You really need to find a friend you can confide in - someone that isn't charging you by the hour.

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. If you need to, use alternative ways to communicate such as e-mail and fax. It takes some of the confrontational potential out of communicating by phone or in person.

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.

Information you will need
Gather your paperwork into one container, preferably mobile, that will help you be prepared and organized. Included should be:

• Tax returns for the past five years
• Retirement account records for both spouses
• 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.

Finding a Lawyer
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 as your spouse. 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.

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 sound 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 an individual IRA or assets inherited from family members.

You're both entitled to a portion of each other's retirement benefits that were earned during marriage. In order to get part of your spouse's pension or 401(k), you'll need a lawyer to draw up a qualified domestic relations order, or QDRO (pronounced "quadro"). There are several options, including a one-time payment, monthly payments at retirement, or a lump-sum payment that you transfer directly into your own IRA, where your money will continue to grow tax-free until you retire. IRAs can be divided without a QDRO, as long as the division is clearly specified in your divorce agreement.

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.

Keep the House?
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.

Can you afford to keep it?
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.

Can you afford to sell the house?
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.

Is your spouse keeping the house?
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 live, 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.

Does joint ownership make sense?
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.

Taxes on the house
If you're awarded the house in your settlement, whether you choose to remain there or sell, you'll have serious tax implications to consider. Before you decide to keep the house, be sure you consider capital gains taxes. Individuals are allowed up to $250,000 in tax-free capital gains when they sell their home. Couples are allowed $500,000. To qualify, you must have lived in the home for at least two of the five years prior to the sale. There is no age requirement.

Child Support and Alimony

Alimony
Alimony is support that an ex-spouse is required to pay to a former mate as provided in a divorce or separation agreement or other written agreement. There are many different ways to handle payment of this amount. Payments can be made on a monthly basis or in one lump sum. Monthly payments are better for budgeting purposes and the payments are tax-deductible to the payer and taxable to the recipient. On the other hand, taking an alimony settlement in one lump sum ensures that the recipient will in fact receive the total amount agreed upon. Monthly payments generally cease upon the remarriage of the recipient, but payments do not cease if the payer remarries or co-habitats with a new partner.

Child support
Child support laws differ by state. As a general rule, payments are based on the needs of the child, the parents' income, and the percentage of time the child spends with each parent. Payments typically continue until your child graduates from high school or is no longer a minor. Child support is not taxed as income to the recipient, and the payer cannot deduct it on his or her tax return.

Unfortunately, fewer than half of all those who are awarded child support get the full amount that they are entitled to. Penalties for non-payment are getting tougher and laws for enforcing these payments are getting stronger. But the fact remains that for many, child support is not a source of income that they can count on.

Establish Your Own Credit
It's important to qualify for credit in your own name so that you will have credit resources once the divorce is final. If you don't have an income of your own, a secured credit card may be the answer. A secured credit card is one backed by a deposit account at the issuing financial institution. Establish a checking account solely in your name for the same reason.

First, a checking account
Basic checking accounts are designed for day-to-day transactions and bill paying, so it's important that you establish one in your own name. A checking account is the foundation for personal finances. These accounts are readily available and easy to open. Find a bank that will offer both ATM and debit cards along with their checking package. Research the monthly fees associated with maintaining a checking account. Some banks charge very low fees. Others can be very expensive.

Second, a credit card
Regardless of your marital status, you should always have a credit card in your own name. It can help you keep up a good credit rating for when you need it. It can also be a powerful source of funds in case of an emergency. Be sure to research which cards are right for you. Get information on selecting a credit card that suits your credit habits best.

Cut the ties
Once you have some credit in your own name, close or freeze all joint credit card accounts. You won't be able to fully close an account if the balance is not paid in full. But if you freeze the account you can be sure that no one can charge any more to the account. If the card issuer won't allow you to close the account on your own, and your spouse refuses to cooperate in closing the account, you can report the card stolen and that will automatically disable the account.

Review all of your joint accounts. If there are any accounts with your name on them, move promptly to take your name off of the account. This includes brokerage accounts or any other type of account that offers to advance any credit.

Once you have closed all the accounts you need to close, order a copy of your credit report. It can be quite a challenge to track all the accounts you and your spouse have opened. A credit report will help you find and close each one of them. If there are any left on your credit report, call the credit lender directly to close the account. Then order another copy of the credit report to make sure it was closed as you requested. Keep checking your credit report to make sure it is correct.

Building a New Budget
After a divorce, your financial situation will probably be very different than before the divorce. Take some time to get familiar with your new situation. A new budget is the first step in adapting to your new financial circumstances.

Get organized. Make copies of all important paperwork to come from the settlement and put them somewhere safe. Create a budget by writing down your expenses to find out where your money is going. Pull out your credit card bills and bank statements from past years as guides to your spending habits. Then estimate how much your new bills will be. Be sure to include expenses for entertainment, clothing and other major spending categories. Include some money for savings. It may take several months to fine-tune your budget.

Now estimate your monthly income. Don't include potential income - only income you are sure to receive. Alimony and child support may be included but only if you are confident that your spouse will pay for them.

Check your budgeted expenses against your income. Do you have more going out than you have coming in? If so, you need to cut expenses. Entertainment bills are easier to trim than fixed costs such as utilities and housing. Keep trimming until you have enough income to cover your expenses. It may hurt at first, but settling into your new financial situation is critical to long-term financial fitness.

The last step is to take whatever proceeds there may be from your divorce settlement and invest them. If you have lost insurance coverage, replace that as soon as you can. Then start saving for your retirement.

Filing Taxes
Taxes are important during and after a divorce. If you haven't consulted with a financial advisor, you should at least talk to an accountant at this point. Tax laws can be complicated and an accountant will be able to tell you what your best tax strategy is.

The IRS requires that your tax return reflect your marital status on the last day of the filing year. So if your divorce isn't final by December 31st then you will probably want to file a joint return with your spouse. But if you still have children at home, and you and your spouse have been living separately for the last six months of the year, filing your own return as head of household may save you money that could go toward legal fees and other divorce-related expenses.

There are tax credits available to the spouse who claims the children as dependents. You'll need to decide which parent will financially benefit from them most and file accordingly.

Alimony is considered income and is taxed as such. On the other hand, child support is not subject to income tax requirements.

Affordable Indulgences
The stress and emotional impact of a divorce can be difficult to handle, and some people comfort themselves by spending money. But in the uncertain financial environment that follows a divorce, spending money may be the wrong thing to do for your long-term financial well-being. You should treat yourself well, but try not to spend a lot of money doing it.

Here are some suggestions for affordable indulgences.
Hot Baths can be relaxing, centering experiences that will help you carve out a little calm time in an otherwise stressful world.

Take a Bike Ride in a park you've never been to. Sometimes depression is a downward spiral. You have no motivation. You don't exercise. You feel blah. It makes you even more depressed. A little enjoyable exercise will get the blood flowing and lift your spirits.

Go Ahead and Cry. Sometimes people get caught up in being strong. But when you're at home alone or with a trusted friend, go ahead and let it out. Crying can become a necessary expression of your feelings. You may start to look forward to coming home and indulging your emotional side. Need some help? Sappy movies can provide the excuse you need to start the tears flowing.

Take a Nap. The emotional demands of divorce can leave you exhausted. Take an hour out of a day to just relax into a nap. You'll awake feeling refreshed and ready to take on the world.

Read a Book - Any Book. Watching television can be draining. Get caught up in a book, escape for a few hours and go at your own pace. Throw some popcorn in the microwave and make a night of it.

Get a Manicure or Facial. When you're constantly taking care of other people or your own problems, it's very therapeutic to let someone take care of you for a change. It also helps your self-confidence, which can take a beating during a divorce.

Go to a Movie by Yourself. Matinees can be an inexpensive way to get out of the house and out of your own problems. And getting out into the world, by yourself, can be a big step toward feeling comfortable with some of your newfound independence.