On the day couples walk down the aisle and say “I do,” almost no newlyweds envision that they might one day get divorced. Unfortunately, though, this is exactly what happens in about half of all marriages in the U.S.
There is a whole host of challenges involved in going through a divorce, such as dealing with the sheer emotions involved. Logistical challenges also come into play, including planning custody and/or visitation rights for children.
Nevertheless, for many couples, the biggest divorce challenges are financial. Divorce usually results in a tremendous financial upheaval for one, if not both, spouses. Not only are there the expenses involved in the divorce proceedings themselves, but dual-income spouses have to adjust to living on a single income that could be significantly less than what they are used to.
The key to ensuring that the financial aspects of a divorce go as smoothly as possible is to do as much preparation as you can once you and your spouse have decided that divorce is inevitable. Here are five financial steps to take before filing for divorce:
- Determine your current financial position. The first step is to determine exactly where you and your soon-to-be-ex stand financially before you begin the divorce process. You need to sit down together and create a balance sheet that lists all of your assets on one side and all of your liabilities (including debts) on the other side.
Also, create an income and expense statement that lists all sources of income for each of you and your current monthly expenses. Previous years’ tax returns and W-2 statements should provide detailed income information, while your family budget (assuming you have one) will provide a good snapshot of your expenses. Together, these documents will provide a starting point for discussions (and possible litigation) regarding division of assets and property and any alimony and/or child support either one of you must pay. Hopefully, you and your lawyers can both agree on these basic economic facts. If not, a special type of financial review -- called a forensic audit -- may be ordered by the judge. This process is costly and invasive, so avoid it if possible.
- Gather and organize important financial information, statements and documents. In addition to tax returns and W-2s, you should also pull together all of your recent bank, brokerage, credit card, retirement account, and mortgage and/or other consumer loan statements. Getting all of this paperwork organized and centralized in one place will help you accomplish step number one. In addition, it will also help you be better prepared to meet with your attorneys and financial planner (see step number 5 below) and make the divorce process go more smoothly in the weeks and months to come.
- Decide what type of divorce you will have. Not all divorces are the same — far from it. In fact, only about five percent of divorce cases actually end up going to court, and in some cases, it is not even necessary to hire an attorney. Therefore, if you and your spouse are amicable and willing to work together and cooperate, you could save a lot of money by opting for a low-cost divorce option.
Getting a divorce without an attorney is known as a pro-se (or “on your own behalf”) divorce. All you and your spouse have to do is complete the paperwork, file it with the court and attend a hearing. Mediation is another low-cost option for handling financial and custody issues in an amicable situation.
However, if your divorce is not amicable and you are concerned about being taken advantage of by your spouse, you should hire a good divorce attorney who will diligently represent your interests. Ask friends and relatives for recommendations, and interview several prospective attorneys before hiring one.
- Save, save, and save some more. At this point, your post-divorce financial life is probably a huge question mark in your mind. Therefore, it is smart to start stashing away extra money now to help cover divorce expenses and provide a solid financial foundation for your new life after your divorce.
Keep your money in a liquid savings or money market account so you can access it quickly without penalty to meet the wide range of expenses you will likely be facing in the near future. These may include hiring an attorney, financial advisor or other divorce professional and the costs involved in moving into a new home (movers, rent and utility deposits, furniture, etc.), among others.
- Talk to a financial advisor who specializes in divorce. A financial advisor may be able to provide invaluable assistance as you make financial preparations for divorce. The keys are to seek an advisor early in the divorce process, and to choose an advisor who specializes in working with spouses who are getting divorced.
Look for an advisor who possesses the Certified Divorce Financial Analyst® (CDFATM) designation. Such an advisor has received specialized training to help you in the areas of personal vs. marital property, valuing and dividing property, spousal and child support, and tax law and other financial issues that are affected by divorce.
There is no sugarcoating the fact that going through a divorce will be painful. But you can minimize the financial difficulties of divorce by making thorough financial preparations before you file.