Financing Options for Divorce

First, I want to open with the fact that if you are searching for ways to finance your divorce, there should be enough assets to divide or liabilities to offload than the cost of financing. As with anything, there are many ways to skin the cat. Seeking the advice of pricey attorneys may or may not work to your advantage.

The best approach is to conduct a cost/benefit analysis regarding the outcomes you can likely expect and decide if it is worth pursuing further by securing financing to “get your share” of whatever you feel you are entitled to receive.

 In the state of California, many of the decisions regarding division of assets and characterization of assets have already been decided. This could be through statutes in the Family Code or by case law. There are numerous case law appellate decisions that guide the court’s decision in many circumstances.

 Since it takes one to tango in divorce, the other side might be stirring the pot and contesting decisions without justification. If they have been ill-advised by their attorney, it will cause both parties to spend more on attorneys’ fees in the process. Try to avoid this with representation that keeps the unwarranted claims at bay.

 Divorce may involve a bevy of professionals from family law attorneys, to estate attorneys, real estate attorneys and tax attorneys.

  It may necessitate financial professionals such as forensic accountants, CDFA® professionals, CPAs and tax preparers, appraisers, and well as insurance and  valuation professions.

 Then there may be costs for vocational experts, mental health professionals such as licensed court appointed psychologists and examiners, co-parenting coaches and other medical and examiners. You may want to work with a divorce coach or someone As you can see, the costs can explode by an order of magnitude much greater than simply the cost of a family law attorney or divorce financial professional.

 If you find that you need additional funds to ensure that you can achieve the end target, that is, an equitable divorce, you may request the other party’s consent to an early division of assets. You can use the funds released to support your financial obligations of the divorce process which is usually more cost-effective than securing additional financing.

 However, this depends upon the liquidity of assets available, the contention of the assets such as characterization as community property or separate property, and the reimbursements that may be expected from the other side’s share of assets.  All of these factors affect the appropriateness of an early division.

 Once you determine that you need to secure additional financing to pursue your divorce, there are many sources to evaluate. Remember that you may not qualify for all of them. Also, you may not be able to pursue certain options due to the nature of your case. Often there is an asset that obfuscates or hinders the pursuit of a type of financing, such as the sale of the marital home when attempting to pursue a HELOC. Of course, there are limits on the funds that may be available to you for each of these options. Not all of these sources are the right fit for you or your needs but are worth considering and exploring at various time during the divorce process.

Eight Potential Options

Following is a list of options you might want to consider as appropriate to your situation and unique needs:

 1.   Home Equity Line of Credit or home equity loan

2.   401(k) Loan

3.   Personal Loan

4.   Securities-based lines of credt

5.   Whole Life Insurance Loan

6.   Credit cards

7.   Divorce Funding companies

8.   Court ordered fees

Home Equity LOC

A home equity line of credit (HELOC) allows you to borrow against the equity in your home. Typically, this is through a variable interest rate which could increase as the rates are adjusted frequently. Although equity in CA marital homes may be high, interest rates in 2024 have increased significantly and this could expose you to higher rates than you may be willing or able to pay for the use of this credit.

 A note of caution is that lenders often will not approve applicants for HELOCs during a divorce because of the uncertain nature of the outcome and ability to pay back the loan.

401(k) Loan

While this is an excellent option, because you are essentially repaying yourself for your retirement, you will need to have consent of the other party (your spouse) to take a loan against the assets. To mitigate the refusal of the other spouse, you may agree to have the loan repaid with funds that would have been awarded to you from that account. This allays any concerns with dipping into the spouse’s side of the community funds.

 And this loan could affect the division of the account if the Plan Summary Document has restrictions about division with an outstanding loan. You should check with the Plan Administrator first, to ensure that the division of this qualified account can still happen in a relatively easy manner. Some Plans require that the loan be repaid first. You would need to then find assets to repay the loan and this could be detrimental to the timing of the division of the account.

 Also note that there are restrictions by the IRS on the amounts that may be withdrawn form 401(k)s and how they are considered for tax purposes. First the maximum that can be withdrawn is 50% of your vested amount or no more than $50,000, whichever is less. The exception to this is if the vested balance is less than $10,000. In such case the participant may borrow up to $10,000.

 IRS restrictions abound.  Repayment of the 401(k) loan must occur within 5 years and payment must be made in substantially equal payments that include principal and interest. Payments must be at least quarterly. Any repayments are not considered to be plan contributions.

Personal Loan

Approval will depend on your credit score, existing outstanding debt obligations, and your ability to repay the loan. If you already have a high debt to income ratio you this will be difficult to secure since these loans are unsecured (that is, relying merely upon your ability to repay).

Securities Based Line of Credit

If you have a relatively large amount of assets at a brokerage, you may be able to take a loan against the value of your investment portfolio. It prevents having to sell securities and incurring capital gains taxes in order to raise cash for your divorce.

However, this again, may require you to segregate your assets from the other party first, as it will be a risk for both of you if these are community assets. Also, the interest rate is typically variable, further increasing the risk of this line of credit.

 The overarching risk of this type of financing is that the brokerage may demand immediate repayment of the outstanding balance or require additional cash or securities to be pledged if the market goes down and underlying securities that guarantee the line of credit are now devalued due to market conditions.

Life Insurance Loan

Whole life and universal life insurance policies have cash values. You may borrow from the available cash value or even cash out the policy and split the cash value between the parties. Often, divorcing couples decide not to keep their policies intact anymore because the need for the life insurance may no longer make sense ( no spouse, children already grown).

 If you choose to take a loan on the policy’s cash value, beware that the death benefit that would be left to your beneficiaries would be reduce by any outstanding loan balance still due.

Credit Cards

Clearly this option is one of last resort given the extraordinary high interest rates on credit card accounts.  If you go this route there is a strategy to offset the decline in your FICO score that is sure to be realized.

 Strategically spread the costs across multiple cards and do not exceed the credit utilization limit of 30% on any one card whenever possible. Of course this can only be done using your own card, not a joint account in which the other party would be affected. 

Divorce Funding

There are companies that specialize in divorce funding. Unlike a bank or finance company these companies assess your eligibility based on the expected outcome of the division of assets and support. They do not use current assets, current income or credit score which may or may not be more advantageous for you depending upon your particular situation.

 Typically, the loan is not due until the settlement is final. No liens are taken on any real estate either. However, there may be a hugely negative impact on your credit score or credit history.  Terms can vary from the company taking a percentage of the settlement, charging an interest rate that may be a balloon payment, or taking a monthly fee and the balance due at upon settlement. 

Court ordered fees

If one party does not have the ability to generate the funds for the divorce, the court may order the other party to pay the fees upfront and then hold any reimbursement potential in reserve for re-allocation to the borrowing spouse who would have to repay after the settlement.

 This option can only be done through a motion and must be filed by the attorney on your behalf. If you are not using an attorney, but need fees for the other professional costs previously mentioned, this option is invalid.

 A decision about which option is best involves assessing your unique situation, the amount of risk you are comfortable taking, the agreeableness of your future ex and the constraints inherent in each of these processes from interest rates, to repayment, to qualifying.

 The pros and cons of each option should be made in context of your credit load, future retirement resources and non-retirement resources, future income, and the ability to pay back the debt. 

This article does NOT constitute legal, financial or tax advice and is for general information purposes ONLY.