Pre-Divorce Financial Readiness: How to Avoid Financial Missteps
The decision to divorce is not an easy one and sometimes fraught with uncertainty about what lies ahead. Divorce is likely the single biggest event of a person’s financial life. It’s a difficult situation, at times overwhelming, and can become a longer process than anticipated.
Long before permanent spousal or child support is awarded or your retirement accounts divided, you will need to prepare a snapshot of your finances for the process. People’s lives and finances are often complex and there can be issues of ownership, inheritance, pre- or post-marital assets, valuation, liquidity, tax consequences, etc. This will enable you to be more aware of what your financial health looks like. It also ensures that you will have the best chance of achieving a favorable settlement.
Most of what is discussed below is required as part of the financial disclosure component for whatever divorce process you pursue, mediation, collaborative, or litigation. The course of action you take depends on whether your situation is amicable or adversarial.
If you’re unsure whether you should take money, move money, change accounts or make other financial decisions, consult with an attorney. Any actions could have detrimental consequences in your case once you file.
Though tempting, refrain from making any beneficiary changes to wills, trusts, retirement accounts, etc., pre-divorce. Again, consult with an attorney first. These could have negative effects on your case and if you have already filed, could be grounds for criminal contempt charges.
Track your household expenses and income. If possible look back one year of expenses in all expense categories: food, insurance, clothing, transportation, entertainment, home maintenance, mortgage, property taxes, utilities, vacations, hobbies, major one time expenses, childcare, extracurriculars, education, cell phone/internet, etc. Income from all sources including wages, dividends, self-employment, gig economy, and income properties.
Make copies of all income tax filings for the past 5 years. Many things about your financial situation that you may or may not be aware of can be ascertained from your tax return.
You will need to plan for retainers for a divorce attorney, mediator, and other collateral divorce-related professionals. Consider sources of funding these expenses. Every situation is different for each couple. You will both need to have sufficient liquidity to fund the divorce. Consult with an attorney regarding the best approach for your particular situation.
Identify all the debts that are outstanding and when they were originally incurred. In many cases, creditors are entitled to look beyond divorce agreements when trying to collect on debt. Obtain a copy of your credit report from all three agencies. This is provided free of charge annually.
Make copies of all financial records and statements. This will comprise your list of financial assets. Know where your money is. Make a list of all institution names, account numbers, title on accounts, balances, types of investments, etc. Knowing exactly what is at stake financially will alleviate surprise, hasten discovery, and avoid delays later on. Find a safe place to store everything confidentially.
In addition to your attorney, a Certified Divorce Financial Analyst® can offer expertise concerning divorce’s effect on your current and future financial situation. An increasing number of people contact them even before contacting an attorney to ask if a divorce is financially feasible. The roles of a divorce attorney and CDFA may overlap in some areas, but the roles are typically complementary. The role of the CDFA is to support the attorney with specialized financial analysis to protect your financial interest during and after divorce. They offer comprehensive expertise and can provide input into the settlement agreement concerning divorce’s effect on your current and future financial health in areas of taxation, insurance and
settlement consequences regarding the division of assets and projections of expected net
worth. Most importantly, a CDFA can help you achieve financial peace of mind.
