Financial Readiness for Divorce
For many people, divorce is the largest financial transaction of their life. Depending on your knowledge of finances and the length of your marriage, the financial aspects of divorce can be overwhelming. However, it is important to look at the positive side of the situation. A divorce forces people to identify their assets, liabilities, and cash flow and to gain a better understanding of their financial situation according to Denton Divorce lawyers.
If you are thinking about divorce or have decided to divorce, there are a number of things you can begin doing to prepare for the financial aspects of the process.
Balance Sheet Inventory
Start making a list of the family assets and liabilities. This will be a crucial part of the financial settlement. Many couples have never put together a personal financial statement, so neither spouse really knows what they have or what they owe. Also, sometimes one spouse has handled all of the finances during the marriage, so it can be difficult for the other spouse to gather financial information or know what to ask for.
Here is a list of assets that you may have that your Denton divorce lawyer would want to know about:
- Bank accounts
- Investment accounts
- Real estate, mineral interests
- Retirement accounts (including IRA, 401k, 403b, 457, pension, etc).
- Life insurance policies (individual and through employer)
- Stock options and restricted stock
- Business interests
- Safe deposit box contents
- Offsite storage facility contents
- Vehicles, motorcycles, boats, jet skis, RVs, airplanes
- Antiques, artwork, collections
- Frequent flyer miles, travel rewards and credit card points
- Pets and livestock
- Receivables from others
- 529 College Savings Plan accounts
- Custodial accounts for children (Uniform Transfer to Minors Act UTMA)
- Tax return carry forwards
Here is a list of liabilities that you may have that your Denton divorce lawyer will want to know about:
- Lines of credit
- Vehicle loans
- Credit cards
- Unpaid taxes
- Unpaid bills (excluding normal monthly bills)
- Amounts owed to other people
Credit Report for divorce financial preparation
Obtain credit reports for each spouse. A credit report is an important part of the divorce process. It is used to identify all open credit card and liability accounts. It also shows whether each account is titled jointly or in one person’s name. All open accounts will need to be listed in the decree and outstanding balances will need to be addressed. In addition, any mortgage, auto loan, or credit cards titled jointly require special consideration.
There are many websites available to obtain your credit report, including those of the three credit reporting agencies – Experian, Equifax and TransUnion. We recommend using the website AnnualCreditReport.com which is the only authorized source for the free annual credit report that is yours by law. The Fair Credit Reporting Act guarantees you access to your credit report at no change from each of the three credit reporting agencies every twelve months. You do not need to purchase your credit score for divorce purposes, just obtain your free credit report.
In all marriages there is a division of responsibilities. If your spouse has handled all of the financial matters, begin educating yourself about bank accounts, investments, retirement accounts, credit cards, etc. What accounts do you and your spouse have? What are the current expenses of your household and your lifestyle? What are the financial implications of your future goals?
You do not need to be embarrassed if handling the finances was not your role and therefore you are unaware of what you have or uncomfortable in this area. It is very common for one spouse to handle the financial matters and for the other spouse to be relatively uninformed.
If you have not worked in recent years, begin thinking about where you would like to work post-divorce and whether additional education or training will be necessary. Unless your estate consists of millions of dollars, you will likely need to work post-divorce. It will not benefit you in the divorce process to be unemployed. It will benefit you much more in the process to have employment or to be seeking employment.
Myth Buster: There is a myth or misunderstanding that if you are unemployed you are more likely to be awarded alimony upon divorce. That is NOT TRUE in Texas according to Denton divorce lawyer. You are only hurting yourself by failing to seek and obtain employment.
There are various options for health insurance post-divorce.
- You can obtain health insurance through your employer. Divorce is a qualifying event that allows you to join the employer plan mid-year, instead of having to wait until the open enrollment period.
- You can continue coverage for a limited time under your ex-spouse’s employer plan under a provision known as COBRA. The maximum time to utilize COBRA following a divorce is thirty-six months and you will have to pay the related premiums, which are often higher than an individual health plan. You must notify the plan administrator of a qualifying event within sixty days after the divorce is final.
- You can apply for an individual health insurance policy. It may take four to six weeks before you are notified about whether you are approved so apply early.
- If you do not qualify for individual health insurance due to current or previous medical conditions, states generally make health insurance available through a high-risk pool. This coverage tends to be more expensive than an individual policy.
- During the divorce process you can remain on your spouse’s health insurance, and your spouse will normally be legally prohibited from cancelling your health insurance until the divorce is final.
(Note: At the time of writing this, there is significant new healthcare legislation that may change some of this information. Please consult an appropriate resource for current information.)
Things Not to Do
There are some financial related actions and behaviors that we recommend you avoid during the divorce process.
Do not spend money on a paramour until you are divorced says Denton divorce lawyer.
Courts and spouses frown on any monies spent on a girlfriend or boyfriend, or monies spent for you to be with your girlfriend or boyfriend. For example, perhaps you did not buy her dinner but you bought your own dinner while you were with her – that is still a problem. And the problem is not proportional to the amount spent. In other words, some divorcing people have said, “It was not that much money, maybe all together it was $900 and we have much more money than that.” It is not the amount. Any money spent that relates to other man or woman causes problems.
One way it causes problems is that it gives the angry betrayed spouse something to look for, be mad about, focus on, point out, talk about, point out again, ask the girlfriend about in her deposition, ask her spouse about in discovery, tell the judge about, tell the collaborative team about, tell the mediator about, tell the arbitrator about, etc. They also think there must be much more than what they found. If they found $900, in their minds that means there was really $9,000 spent, but you just did a better job hiding the rest of it.
The way people get caught is bank records, credit card records, phone records including texting history and toll tag records. Statements for travel award programs and frequent flyer miles can also provide documentation of your activities. Your spouse can also ask your girlfriend or boyfriend under oath in a deposition or at a hearing on the stand.
In collaborative cases there is less focus on historical behavior and more focus on the future. In collaborative cases there are no depositions or hearings and therefore no embarrassing questions of the paramour. However, even in collaborative, it is more difficult to strike a favorable deal quickly and efficiently if we have to deal with all of the emotion and fallout related to an affair and money spent on the paramour.
There is a theory that some people get caught having an affair intentionally because they are too fearful to end their marriage and are instead trying to force the other person to do so (perhaps even unconsciously). This theory was developed after years of seeing smart people conceal their activity very poorly. Examples of this behavior might include leaving the other woman’s underwear in the family laundry, using a joint credit card for obvious purchases such as Victoria’s Secret or a secret post office box. If you are going to go to the trouble of getting a secret post office box, why would you pay for it each month with a joint credit card that you know your husband checks?
The issue of a paramour is going to cost you a lot of additional money to deal with – in attorney’s fees, professional fees in collaborative cases and court costs. This is going to cause your spouse to focus on something that makes you evil and makes them the victim. Therefore, if you are reading this and it is not too late, do not spend money on a girlfriend or boyfriend or on yourself to be with them. If it is too late, stop now and at least minimize the situation as much as possible. Courts hate it and judges will penalize you for it, although the penalties are never as much as the angry betrayed spouse would like.
Do not raid the accounts (usually) says Denton divorce lawyer.
Some people remove all of the money from the joint bank accounts prior to filing for divorce. Some people remove half of it. They do this because they are afraid the other person will remove all of the money and they are beating them to the punch, so to speak.
Only in very rare and limited circumstances is removing any money advisable. Unless it is absolutely necessary, the backlash from your spouse and the ill effects on the divorce process are not worth it. When you empty the accounts you are declaring war. You are greatly diminishing the likelihood of a civil, amicable, efficient, and less expensive divorce. You should first consider the true likelihood that your spouse will empty the accounts. Also, keep in mind that in some counties a standing order is issued upon filing for divorce which would order your spouse NOT to empty the accounts.
You do, however, need access to enough money or credit to cover your own expenses for up to a month and to pay a lawyer’s retainer fee. In a worst case scenario where you do not empty the accounts but your spouse does, your lawyer will schedule a hearing, typically within a few weeks, and the judge will likely order your spouse to return the money to the joint accounts or will order your spouse to provide you with a defined amount of money each month until the case is finalized and the money is ultimately divided.
Do not hold money in your business to keep it from your spouse.
If you have a business, part of the divorce process will be a business valuation and review of the business financial statements. Holding cash in your business in an effort to keep it from your spouse does more harm than good. It makes it appear that you are acting in bad faith and it can hurt an already cash strapped family.
Do not take on new debt if you can avoid it.
Some people must use credit cards to pay for attorney’s fees or other extra expenses that come up during the divorce process. However, it is best to minimize the amount of new debt that you incur. It is also advisable not to make any large purchases or large financial commitments until you know what the overall financial settlement will be.
Do not insist on a settlement that is not financially feasible.
Sometimes people go into the divorce process with a certain outcome in mind. They want a certain percentage of the estate, a certain amount of support or a certain parenting time schedule. With regard to the financial settlement, there is a certain range of outcomes that is reasonable. Be willing to listen to your attorney and a neutral financial professional about whether what you want is financially feasible. If it is not feasible, do not end up depleting the estate further paying attorney fees to fight over it. This is usually a fear based or anger based position.
Do not change your beneficiaries until after the divorce is final.
If you want to change your beneficiary designations, you need to do so either before the divorce is filed or after the divorce is finalized because in many cases the Court will issue a standing order that prohibits you from doing so. Also, in many cases you cannot change the beneficiary from your current spouse without your spouse’s written consent because of community property laws in nine states, including Texas. The most common practice is to update your beneficiary designations after the divorce is finalized.
Do not change the credit card limits, with some exceptions.
When you file for divorce, many counties will issue a standing order which will specifically prohibit you from changing the credit card limits. There are two ways a person may want to alter the credit card limits – up or down. If you want to reduce the credit card limits to restrict your spouse’s ability to run up the balances, you should talk to your attorney about other ways to accomplish this goal. Usually reducing credit limits will hurt your credit score, so it is usually not in your best interest to do so. Alternatively, you may want to increase your credit card limits to potentially improve your credit score and to have more credit available to you after the divorce is complete. It is generally best to keep everything status quo until the divorce is final; however, if you have specific reasons to increase or decrease credit cards limits, discuss it with your attorney, a neutral financial professional or your spouse.
What if the biggest asset in the divorce is your business? There are generally three ways to handle the business. One is that both parties continue to co-own the business. Since the two of you do not get along well enough anymore to remain married, it is unlikely that you can realistically co-own a business together post-divorce. Another option is to sell the business and split the proceeds. This is usually not a realistic option because the business is likely a significant source of the family’s income and it may not be that easy to sell. The third and most likely option is that one spouse keeps the business and buys out the other spouse. This is when a business valuation is needed.
For example, let’s say that Fred and Wilma own Bedrock Construction Company. Fred runs the business. Wilma does not work in the business, but the business was started during their marriage and she would certainly like some value out of it.
In litigation and in collaborative cases, there are professionals that can be hired to value the business for divorce purposes. A valuation for divorce purposes is different than a valuation for any other purpose. Special rules apply. Wilma and Fred could agree (and would likely do so in a collaborative case) to hire a neutral business valuation expert. Or Wilma and Fred could each hire their own business valuator (otherwise known as competing experts).
Certain factors are considered that have a significant effect on the ultimate valuation amount. One factor is the degree to which Fred is a key player in the business, especially in service businesses such as lawyers, doctors, and CPAs. For example, let’s say that Fred was really a lawyer and his firm was called Fred Flint, Attorney at Law. People came to Fred to hire him because of Fred’s reputation. If Fred left the business, it would be difficult for the business to continue because the clients are loyal to Fred and would likely follow Fred to another firm. On the other hand, let’s say Fred was a partner in a large law firm called Stone and Pebble which had hundreds of lawyers. People hired the firm, not because of Fred, but because of the reputation of the firm. In this example, it would be easier to value Fred’s partnership interest in Stone and Pebble because he could likely sell it more easily.
Other factors that may affect the value of the business interest include what similar businesses have sold for, the discounted net cash flows of the business, the value of the assets, whether it is a controlling interest or a minority interest, and how likely it is that anyone would actually want to purchase the business interest.
Advantages of a Financial Professional in Collaborative Divorce Cases
If you choose to use the collaborative model for your divorce (discussed in more depth later in the book), there are a number of benefits to including a Financial Professional as part of the collaborative team. Many attorneys will not participate in a collaborative case unless it is a “full team” that includes a Mental Health Professional and a Financial Professional.
- The Financial Professional gathers all of the financial information and documents, reviews the information, and puts it into reports that are useful to the team and the clients. Having one neutral Financial Professional to handle the financial information allows the attorneys to focus on the bigger picture, creates efficiencies and saves money on fees.
- During option development, the Financial Professional can provide ideas and feedback in the best interest of the family without the restriction of only representing one of the parties.
- During divorce when trust is low, spouses frequently have trouble believing what the other spouse says about their financial accounts, financial history or financial future. This is especially true when one spouse has a strong financial background and has always handled the family finances. The non-financial spouse needs to hear financial information from an independent third party in order to feel comfortable.
- In cases where one spouse has a strong financial background and the other spouse has limited financial knowledge, it is helpful for the Financial Professional to educate the non-financial spouse on financial issues to keep the process moving in an efficient and cost effective manner.
- Depending on the specifics of the case, offline meetings, with the two clients and the Financial Professional may be used to work through issues and reach tentative agreements without holding a full team meeting or paying fees to four professionals during that time.
How to Find a Good Financial Professional for Your Divorce
It is important that you work with a qualified and reputable financial professional during your divorce. The person should hold one or more of the following professional credentials:
- Certified Public Account (CPA)
- Certified Financial PlannerTM (CFP®)
- Certified Divorce Financial Analyst TM (CDFATM)
In addition, they should have experience and specific training in divorce matters.
If you are using the collaborative approach, your attorney and your spouse’s attorney will usually select the neutral financial professional for your case. If you are looking for a financial professional outside of the collaborative process, ask you attorney or other professionals for referrals in your area.