Financial Tips to Help when Dealing with the Sticker Price Shock of Getting a Divorce
For some, divorce is a five-letter word: shock. Some spouses never see it coming. And after that initial shock wears off, another will inevitably take its place: sticker shock.
“I don’t think I ever had a single client come to see me for an initial appointment who did not balk at the cost,” said Brette McWhorter Sember, a former divorce attorney and author of The Divorce Organizer & Planner and The Complete Divorce Handbook. “Most attorneys require a retainer up front and then bill hourly. Getting that retainer together is hard enough for most people, but coping with the monthly bills afterward can be overwhelming.”
The financial impact of divorce also hits society hard, as well. According to a recent study from George State University, divorce and out-of-wedlock childbearing cost U.S. taxpayers more than $112 billion a year.
Whatever the costs, spouses blindsided by a divorce don’t have time to do their homework before they’re served final papers. You’d be surprised at how fast those expenses, both legal and otherwise, can pile up after the divorce.
In order to stay afloat, Ethan Ewing, president of Bills.com in San Mateo, California, suggests you first accurately assess your debts and liabilities, and pull a “tri-merge” credit report (a summary from all three major reporting bureaus available at www.myfico.com). Detail and write down all of the shared and individual liabilities that exist,” he said. “Settle (or get a judgment) on how you’ll allocate these liabilities.”
“You’ll also need to budget for payments, which means creating a detailed budget, using any free cash flow to pay off debts. Be sure your ex-spouse is making his or her payments too,” Ewing advised. “There are some very important implications if a spouse does not meet his/her end of the bargain on liabilities allocated through the divorce proceedings.”
“If you owe back taxes, be aware that the IRS does not have to honor a decision from a divorce judgment. Make sure that your spouse does not create a tax liability for you that you are unaware of. For jointly held credit cards, and for any other debts incurred during the marriage in community property states, you have shared liability, meaning you also share any potential negative credit rating impact.”
“If your spouse does not make payments after the divorce, it could come back to haunt you and your credit rating,” he warned. “Remove your name from joint accounts or better yet, close accounts that have no balance.”
“Finally, it is imperative that you rehabilitate your credit and financial health as soon as possible. Begin a savings plan to accumulate wealth, and reinvest in any proceeds/equity that come out of the divorce proceeding,” recommended Ewing.
“If you find yourself in trouble during this stressful time – in which you must make many financial decisions – seek help immediately from a reliable, professional debt resolution firm. But make sure that this type of firm operates on the consumer’s behalf, and is markedly different from credit counseling, debt consolidation and debt management firms,” he added.
“Spouses who find themselves unable to afford the cost of divorce should consider mediation – a less expensive and less combative alternative to court battles.” Linda Y. Leitz, CFP, EA, founder and co-owner of Pinnacle Financial Concepts, Inc. in Colorado Springs, Colorado, and author of We Need to Talk: Money and Kids After Divorce, advised spouses to keep the lines of communication open. “This can make the divorce – and the years of co-parenting after the divorce if kids are at home – much less expensive,” she noted.
“Staying out of court keeps legal and other professional expenses down and your control over the situation higher. Going to court generally means that a stranger is going to make some huge decisions about the rest of your life and you need an attorney and other professionals to put your situation in front of that judge in a way that can be understood,” Leitz explained.
For some, there is no alternative to entering the courtroom. But by making the right financial moves, divorce can spell another word: freedom. Here’s a list of immediate financial steps to take after separating from a spouse:
1. Get a new bank account.
Open up a separate bank account in your name alone and place all of your work-related earnings and income going forward into the new account.
2. Separate your credit cards.
Open up new credit card/cards and use the cards for your separate expenses.
3. Place limits on credit cards.
If possible, place reasonable limits on the joint credit cards to keep a limit on your spouse’s spending and to prevent overcharging. This will assist you in preventing your spouse from creating a fictional monthly need (for purposes of spousal support) that exceeds the marital standard of living and from subjecting both parties to additional unnecessary credit card debt.
4. Change your estate plan.
Revise your estate plan to remove your spouse as beneficiary of your will, any trusts, and IRAs or other investment accounts. This could require you to provide your spouse and her/his counsel with proper and timely advance written notice depending on the applicable laws. Otherwise, the change in the estate plan could later be found by the court to be null and void due to improper notice or failure to provide timely notice.
5. Check the numbers.
Keep a clear accounting of both your own and your spouse’s (if possible) expenses and income going forward.
6. Make copies of financial information.
Get copies of all tax returns (joint and/or separate), financial account statements and credit card statements for at least the last three years of marriage as well as real property deeds, car registrations/pink slips, and other purchase documents for major personal property items.These documents are necessary for determining income for each party for purposes of spousal and child support as well as attorneys fees and characterization of property in the community estate.
7. Get an attorney.
See an attorney to obtain legal advice before the divorce.
8. Make copies of computer files.
Copy the hard drive from the home computer for any relevant documentation such as Quicken and/or other financial reports.
9. Get bank information.
If you have online banking, obtain as many online banking statements from all joint bank and credit card accounts.
10. Review bank information.
Review all bank account statements and/or credit card statements for the past few years to determine whether there have been any transfers of funds out of the account to some other unknown account or for an unknown expense.
11. Gather property information.
Gather information pertaining to separate property claims including money/accounts/property that you had prior to the marriage, gifts during the marriage, and inheritances received both before and during the marriage.
12. Inventory your property.
Prepare an inventory of valuable personal property such as artwork, wine collection, antiques, fine rugs, and jewelry. Make sure to photograph or videotape these items.
13. Pay attention to your mail.
Be sure to pay attention to mail coming in that may give insight to financial accounts you didn’t know about.
14. Talk to your accountant.
If have a joint accountant, set up a meeting with the accountant to go over your entire tax file for the last three to five years and have material documents copied.
15. Check your assets, debts.
Locate liquid assets that you can use to pay for an attorney and outstanding bills. One idea: use some of the cash value of your life insurance account.
16. Stay calm.
Never make a financial decision under great emotional distress.
Source: Joel Schwartz from Nachshin and Weston, LLP.
