Did you recently get divorced, or are you in the process of getting a divorce? Have you considered how you are going to handle the financial implications of a divorce?
Divorce is not only an unfortunate event, but couples go through a lot of turmoil when they get divorced. Not only is their personal life thrown into chaos, but their financial life also experiences tremendous upheaval.
One of the biggest problems people face after getting divorced is how to deal with their personal finances. The process of divorce suddenly pushes them to figure out how to live on one income, pay for two households, and deal with all the other associated costs and expenses. And, if you have kids, then the situation with finances is way more complex and entangled.
If Divorce is unavoidable, then surviving financially post-divorce should be a priority for both parties. The worst mistake separating spouses can make while going through a divorce is not handling the division of their finances effectively.
It isn’t easy to untangle the finances of two people. Long before a child or spousal support order is issued, you’ll need to prepare your money for the labour ahead.
When it comes to resolving your divorce’s financial issues, financial clarity and honesty are a must even though, in most cases, the divorcing spouses may try to withhold financial information from each other.
Because each divorce is different, case-specific advice can only come from specialists who are familiar with the situation.
In this MoneyTalk, we will talk about finances and money when going through a divorce so that you can make the right decisions for yourself and your family.
Let’s first talk about Divorce Mediation.
Divorce mediation is a process in which divorcing couples meet with a trained mediator to work out the terms of their divorce instead of going to the court and letting the judge decide. If you are considering mediation, you should make sure that you find an experienced and qualified mediator. The mediator helps the divorcing couple communicate with each other and reach agreements on important issues, such as child custody, visitation, child support, alimony, and division of property.
Mediation can be an effective way to divorce because it allows couples to avoid the stress and expense of a trial. It also gives them more control over the outcome of their divorce since they are the ones making the decisions, not the judge.
Regardless of whether you using the services of the mediator or going to the court, you should prepare and plan to address these money and personal finance-related issues.
1. Distribution of Property including Assets and Liabilities
It is important to make sure that both you and your spouse are aware of all the assets and liabilities that you have. This includes everything from bank accounts and investments to furniture and vehicles. You and your spouse should both sit down or work through the mediator in tallying both of your checking, savings, and credit card accounts. You should look at the total balances in your bank accounts as well as the value of the other assets that you have such as stock investments, your house, vehicles and anything else of value. This will give you the total value of assets you both own. Then you should tally all the liabilities including loans and debts that you both have. Examples of liabilities are Credit Card debts, mortgage loans, car loans, and any other type of debt. Once you have a complete picture of your finances, with the help of the mediator, you can both work together in distributing the Assets and Liabilities. By law, getting a divorce does not absolve you from the debts that you both owe to your creditors, and you are obligated to clear your debts regardless of whether you are together or divorced. You may both decide to pay off the outstanding debts by selling some of your assets. If you and your spouse are unable to pay off all your joint debts with traditional assets, you and your spouse must agree on who is responsible for which payments.
2. Child Custody, Child Support and Alimony
If you have children, you will need to come to an agreement on who will have custody and how much time the other parent will get with the children. This can be a difficult decision, but it is important to think about what is best for the children. You can both fight it out in the court for the custody of the children, or you can work amicably and figure out a mutually agreed child custody plan by keeping the interest of the children as the foremost priority. If one parent has primary custody of the children, they will likely require the other parent to pay child support. As a parent, you are required to provide for your children’s needs, even if you both are no longer together as a couple. The amount of child support is based on a number of factors, including the income of both parents, the number of children, the children’s age and their needs. In addition to the child support payments, one partner may also be required to pay alimony to the other partner. Almony is basically financial support that a person is ordered by a court to give to their spouse during separation or following divorce. Both of these payments will have a significant impact on the overall earnings and finances of the parties involved. And, since the child support payments and the alimony will be paid for many years, the aftereffects of the divorce will be felt for many years.
3. Retirement Accounts
If you have any retirement accounts, such as a 401k or an IRA, you will need to figure out how to divide them up. This can be a complex issue, so it is important to get professional help. Your retirement accounts are a significant asset, and you want to make sure that you both get your fair share. You should remember that if either one of you were to cash out the retirement accounts, you will be charged a 10 per cent penalty for early withdrawal. You will also have to pay Federal as well as State taxes as this withdrawal will be considered an Income. If you have other long terms investments such as Annuities, then you will both have to work together with seasoned professionals such as Financial Advisors and Planners to handle these types of investments. Additionally, you should both discuss with the Advisors how the divorce will impact your Social Security benefits after the age of 60. When you were married, and if one of the spouses was not working, then how much they could get depending on the Social Security contributions of the working partner, needs to be understood. While there may be general animosity between the partners towards each other due to the divorce, you still would not want one of the partners to be left in a financial lurch and have to fend for themselves in their old age.
4. Taxes and Insurances
You will also need to figure out how to file your federal as well as State taxes after your divorce. When you were married, most likely you would have been doing a joint filing for your taxes which would then have given you considerable tax savings through deductions. But, now that you would be filing as a single, then you may end up paying more in taxes. If you have children, you will then need to determine which parent will claim them as dependents. You may also need to pay taxes on any assets that you receive as part of the divorce. This is a complex issue, and you should get professional help from a tax consultant to make sure that you do not end up paying more taxes than you owe. You will also need to make sure that you have adequate insurance coverage after your divorce. This includes health insurance, life insurance, and disability insurance. If you have children, you will need to ensure that they are covered by health insurance. You may also need to get renter’s insurance if you are moving into a new home. It’s important that you hire a professional who can give you unbiased advice in navigating these situations.
Let’s summarize what we have discussed in this MoneyTalk.
A divorce is an unfortunate event that has a tremendous emotional as well as financial impact on the lives of everyone involved. If it is unavoidable, then couples need to be pragmatic about the situation and work towards having a financially manageable post-divorce life. While going through the divorce proceedings, one should consider these important issues that they will have to deal with:
1. Distribution of Property including Assets and Liabilities
2. Child Custody, Child Support and Alimony
3. Retirement Accounts
4. Taxes and Insurances
It is important to handle money and personal finance-related matters so that the involved parties can emerge from the divorce with as much less financial damage as possible. Even though the union may have ended, you both are individuals who need to survive and thrive financially. Planning and preparation will go a long way in helping you recover from the financial damages of the divorce.