This is an excerpt from our e-book, Before You Say ‘Don’t’: A Beginner’s Guide to Divorce.
When people talk about divorce and finances, they’re usually discussing the division of property, alimony and child support. But there is another money issue that often gets overlooked: how do you pay for the actual divorce for the attorney or mediator fees and related filing costs especially if you’re barely making ends meet or if most of your assets are tied up in property or retirement accounts?
First, figure out if you are in for a super cheap divorce (less than $1,000 for a do-it-yourself divorce), an expensive divorce (more than $30,000), or a middle-of-the-road divorce (between $3,000 and $15,000). There are several factors that go into this equation, including:
- Is your divorce uncontested or contested? Can you and your spouse come to an agreement without going to trial (uncontested)? If so, your divorce will be less expensive than a contested divorce, which has the potential to drag on, costing you and your spouse several thousands of dollars in attorney fees.
- How eye-to-eye are you and your spouse? Do you agree on most of the major issues: child custody and visitation, splitting assets, spousal support and child support? If not, what are the major sticking points? Knowing these things before coming to the divorce process can save you time and money.
- What do attorneys in your area charge per hour? If you live in an area with a relatively high cost of living, attorneys may charge more per hour than those in regions with a lower cost of living.
- How much help do you need? Will you both need your own attorney or can you work with a mediator or Wevorce Architect instead to save money?
Next, figure out a course of action. Can you finance the divorce using traditional methods or do you need to look into some of the more outside-the-box financing options? Possibly, you and your spouse will do a blend of traditional and non-traditional. Here are a few of your options:
Cash: Do you have a regular savings account that you can easily access to pay for attorney fees and other divorce costs? Is there enough money in your checking account to cover your joint divorce costs? This is, of course, the simplest option for financing a divorce. But keep in mind that, if you have already been served with a temporary restraining order to keep you and your spouse from depleting joint assets during the divorce process, the only account you may be able to access is your joint checking account.
Credit cards: More attorneys accept credit cards these days, but that’s not always the smartest financial option for couples. For starters, the high-interest rates will make your divorce that much more expensive. And most financial gurus will tell you to pay down your credit debt before you file for divorce. Keep in mind even if your ex is the one who winds up having to pay the debt in the end, if he or she fails to make timely payments, your credit score could suffer as a result.
Retirement accounts: Again, most financial experts will tell you to leave the money in your 401K or traditional IRA alone and let it grow until you retire, but for many couples, their retirement accounts are the only substantial assets they have. Be aware though, taking cash out of your retirement accounts will cost you not only will you not have the potential earnings on that chunk of money for your retirement, but you will be taxed at a regular rate on the income and will have to pay a 10 percent penalty if you remove cash from your traditional IRA or 401K plan before the age of 59. There is a way to avoid the 10 percent penalty, however. If your divorce agreement stipulates you owe your spouse a portion of your retirement account, there is a tax code that allows people to transfer money out of their 401K or traditional IRA to an “alternative payee” before the age of 59 and avoid the 10 percent charge. That money will still be taxed at a regular rate, however, so if you are awarded $40,000 from your spouse’s retirement plan, you will really receive $32,000 after taxes are withheld.
Loans from family/friends: Finding a family member or close friend who can afford to fund the upfront cost of your divorce could work, but only if you expect to have the funds to pay them back with interest after your divorce is finalized. According to the financial experts at Credit.com, loaning money to family or friends often carries less risk than co-signing for that person to take out a bank loan.
“Cosigning creates a false sense of security,” writes Gerri Detweiler, Credit.com’s director of consumer education. “You think the primary borrower is responsible for the loan, and you as a cosigner are not. In fact, when you cosign, you are on the hook for the entire loan.”
In an article about how to loan money to family or friends, Detweiler recommends getting the loan repayment and interest rate down in writing and charging an interest rate that is in keeping with the IRS’ Applicable Federal Rate. Keep in mind that the IRS will likely treat any family/friend loan over $12,000 as a gift and implement the higher-rate gift tax on that money.
Keep in mind that you can apply for a personal, traditional, bank loan in your own name during your divorce. This separate debt cannot be included in your divorce settlement repayment plan, so expect to pay this one back without the assistance of your soon-to-be-ex-spouse.
Divorce financing: Companies dedicated to financing high-cost, contested divorces are a relatively new phenomenon. According to a recent Reuters article, the divorce financing industry is the latest niche designed to finance litigants mainly wives of high-earning husbands who can’t afford to fund an expensive, prolonged divorce before receiving their settlement. Companies that offer this type of service are looking for clients who have at least $4 million in marital assets, so this is not an option for typical, middle-class families.
Pay-as-you-go: Available through Wevorce, this type of funding option allows couples to better plan their divorce costs. Unlike going to a mediator or a divorce attorney, Wevorce offers a flat fee that is determined at the beginning of the process. There are no hidden or extra fees, so families will know exactly how much they owe before and plan ahead. There is no hourly billing with Wevorce, so you don’t run the risk of running up a gigantic bill if you need a little extra time to work through a particular issue.
Selling valuable items (i.e. collectibles, cars, jewelry): So what can you do if you don’t have savings, can’t obtain a loan from a bank or family, can’t borrow from your retirement account and don’t have extra money after your monthly bills are paid? Often, couples have valuables such as cars that are paid off, collectibles and jewelry that they can sell to come up with extra cash. This process may take a bit longer, and usually requires a bit of planning and agreement on the part of both spouses, but companies are getting savvy to this niche market. One company actually makes the process of selling your diamond jewelry — do you really want to hang on to that engagement ring? — much less painful. WP Diamonds offers a stress-free process for people who want to sell their engagement ring, but don’t want to deal with the hassle of finding a buyer. Here’s how it works: You go through WP Diamonds online inquiry process. They send you a FedEx shipping label with free insurance. You send your ring. Their appraisers offer you a buying price. If you accept the offer, the company sends payment within 24 hours.
Going through a divorce is an extremely stressful process. For many couples, money issues were a main cause of their marital troubles, and worrying about how to pay for the divorce just compounds an already tense and emotionally draining experience. Exploring your financial options, being open to creative means of financing your divorce, and being honest with yourself and your divorce team about your current financial status and being realistic about your future financial outlook can help alleviate some of this stress.