Divorce proceedings can be among the most financially stressful events you’ll ever experience. Perhaps you’re coming out of an unhappy marriage or your partner feels it’s time to move on. Both of you are looking to make a fresh start.
But before you do, it’s important to make sure that you’re asking the right questions. By taking the time to answer the important questions and have honest discussions, you and your former spouse can take the right steps towards moving forward.
To the extent that you can, it’s a good idea to find areas of common interest.
Mutual best interests
A lot of couples can find the right answer simply by looking out for what’s best for the entire family.
For example, one spouse might want to keep the family house for a certain period of time (i.e. just until the kids finish high school). In many divorce cases, keeping the house leaves that spouse ‘house rich, cash poor.’ There are numerous studies indicating that in many cases, keeping the house might not be the best option.
While it might not make long-term sense to ‘keep’ the house for the long term, there might be several different ways to negotiate some of these concerns into the settlement.
Being able to negotiate a settlement that allows for the eventual sale of the house might help to:
- Reduce overall tax liability
- Provide a more enriching childhood experience for your minor children
- Allow each spouse to get a little of what they wanted
- Help the ‘keeper’ to maintain financial stability and preserve their financial assets
When you look at everything at stake in your divorce, you should understand that there are ways to ensure a fair property division. You can negotiate what you want without having to shortchange your long-term future or your ex-spouse’s own needs.
Not every divorce can be resolved without a knock-down, drag-out fight. But one thing is certain: If you don’t arm yourself with the facts, you’re more likely to face major problems.
This article identifies 7 questions you should answer to make the most of the current situation and ensure a better future after your divorce. But it’s not enough to simply ask the question.
You must actually take time to think about and research the answers to the following questions. Or hire someone who will help you do so.
Divorce Question #1: What do you own?
This is a broad question that can be broken down several ways.
Is it separate property or marital property?
Generally speaking, separate property would be something that one spouse brought into the marriage. Or it could be something obtained separately (like through an inheritance or a gift to that spouse only).
Marital property would be everything that was obtained or earned during the marriage. Or it could be separate property that was brought into the marriage by a spouse.
One common mistake a lot of people make is that they erroneously assume that an asset is the other spouse’s separate property. Then it turns out that the asset is marital property that they have an interest in. In other words, the unsuspecting spouse short-changes themselves before the negotiations even begin.
A common example is investment accounts. Just because a workplace retirement plan is in your ex-husband’s name doesn’t make it separate property.
Don’t make this assumption. Instead, assume everything from your marriage is marital property. Then let your divorce lawyer or your state’s legal system explain away the things that might be separate property.
What kind of assets?
House, retirement accounts, bank accounts, stuff (i.e. cars, furniture, etc.). Those are the common things.
How about interest in a family business? Stock options? Deferred compensation? Those are all things that your family owns. You might get the information you need from your ex’s financial affidavit.
But you might have a difficult time uncovering everything.
What might my ex-spouse be hiding?
This is a particularly tough question to have to sort out. But if you’re coming out of an abusive relationship, you deserve to have a clear idea of everything your spouse might be hiding.
You might need to hire professionals, like a divorce-focused financial advisor to sort through the details. But you can help out by giving them a little more information to start with.
Is it a short-term or long-term asset?
Your best odds of post-divorce success lie in your ability to strike a balance between short-term and long-term needs.
Short term: You want enough cash & liquidity to help you adjust to your new life. Long term: You want to make the right decision when it comes to investment assets that can provide financial security.
For example, you don’t want to short-change your interest in a long-term asset that might grow over time, like your ex’s pension plan or a business interest.
Does it have sentimental value or real value?
Some things might have real sentimental value, but no real value. Or the sentimental value that you place causes you to think that it’s more valuable than it really is.
One of the best ways to ensure financial ruin is to trade away things that might have real value in order to keep something that’s sentimental.
What is the tax treatment?
Retirement accounts, collectibles, cash, appreciated stocks. What do they NOT have in common? They all are taxed differently.
So a $50,000 Roth IRA does not necessarily have the same value as $50,000 in a 401(k). A Roth IRA can potentially result in tax-free withdrawals. However, a 401(k) would eventually be taxed at your ordinary income rate. Both of these assets are taxed differently from the capital gains that you might pay by selling appreciated stocks.
When trying to divide your assets, it’s important to keep these things in mind. Knowing what you have is the first step in knowing what to expect.
Divorce Question #2: What do you owe?
In addition to knowing what you have, you need to have a good understanding of what you and your former spouse owe.
Here are some things you should understand:
The nature of your debt.
Is it a fixed-rate, low interest rate mortgage on the house you bought as a married couple? Or is it a bunch of credit card debt your spouse racked up when you started to have marital problems? Perhaps it’s a car that your ex splurged on after you had filed for a legal separation.
The best thing you can do is get a clear picture of what you and your former spouse owe. What kind of debt, interest rate, etc. All of these matter.
Can you pay off your debt?
Some debt, like a mortgage, probably won’t be paid off unless you sell your marital home. Others, like credit cards, might be more manageable, unless you’re having significant issues with your finances.
You and your ex should take the time to identify:
- What debt you can pay off as part of the divorce settlement
- What debt can be kept
- Who is responsible for what debt
For example, a spouse might keep the marital home, and the other spouse makes mortgage payments as part of the spousal support agreement. These are all things that you should discuss with your family law attorney or mediator.
For a more in-depth exploration on this topic, we’ve written a separate article about things to consider about paying off debt as part of a divorce.
What’s the impact to your financial situation?
It makes no sense to wipe the slate clean if you don’t have the financial resources to take the next steps after your divorce is final.
The important thing to consider is striking a balance between paying off debt and keeping assets for your future.
Divorce Question #3: What are your ‘must-haves?’
Sometimes, when your marriage ends, there’s something you can’t part with.
For example, in many divorces, one spouse might insist on keeping the house after the divorce. Even if it makes more sense to sell it.
In many instances, a spouse might not realize what they “can’t do without” until they start dividing assets. However, if you know (and prioritize) what’s important, then you’ll make better decisions as you split the marital assets up.
Divorce Question #4: What can you walk away from?
If you’re that spouse that wants to keep the house, then you might need to decide what you can do without. When you’re considering this important decision, you should think of it two ways:
Is the struggle worth it emotionally?
If you have children, ask them! If you have other family members who live close, ask them as well!
What can I afford to give up?
From a financial perspective, can I walk away from something and ‘be done with it?’ Some people walk away from an equitable distribution knowingly.
Simply because they’re ready to move on from a loveless marriage. Or onto the next relationship.
For example, let’s imagine you’re going through a nasty divorce. Your ex-husband’s 401k might be an unpleasant reminder of your marriage. But if it’s a significant amount, could you afford to walk away from it?
Stock options, deferred compensation, business interests, executive bonuses—these are all things that are complicated. You might be tempted to quickly finalize the divorce and ‘move on.’
But is it moving on if you’re still struggling five years from now? Perhaps it’s worth that extra couple of months to make sure you’re getting your fair share.
Divorce Question #5: What do you expect support to look like?
You might be the person expecting support. You might expect to pay support for child care. This might be marital support (or alimony), or a certain amount of child support.
Before you sign off, you need to have a clear understanding of what you can expect. And that’s something no article can walk you through.
Unless you’re young, with few assets, or have pretty equal net worth & income levels, you ask this question to your divorce attorney. If your ex has a prenuptial agreement in place, you should definitely ask your attorney what you’re entitled to.
And your lawyer needs to take the time to clearly answer this question and address your concerns before you move forward.
Divorce Question #6: What can you do so that your finances are better in the future? one year from now? Five years?
Once your divorce is final, there’s not a whole lot you can do to ‘unring the bell.’ But you can start planning for life down the road, and make sure that your divorce settlement helps you get there.
But you’ve got to start planning ahead and be prepared for the hard work that lies ahead. One of the best ways to face this challenge is to break this up into milestones.
What will my life look like in one year?
If you’ve been out of the workforce, you probably can negotiate some sort of rehabilitative alimony until you get back on your feet. This might be your one-year goal.
But what does ‘on your feet look like?’
Does it look like paying bills until you find a job? Does it look like going back to college? Does it look like re-taking an exam for a certification that’s lapsed?
As part of your near-term plan, you should identify your immediate challenges and build a plan to address them. With an eye towards the future.
Where do I want to be 5 years from now?
The more you can visualize your future life, the more clearly you can articulate your needs. And the more clearly you can articulate your needs, the more likely it will be that you can get what you need.
Perhaps it’s that college degree. Maybe it’s getting back into the kind of job that you had before you stopped to have children. Or perhaps it’s getting that second career into second gear.
Odds are, you might need some help to get there. And this is not an area where you want to skimp on professional help.
Divorce Question #7: What kind of professional help do I need?
In relatively simple circumstances, perhaps all you need is a mediator. Or you can handle this through the collaborative divorce process, if that’s available in your state. Both of these are relatively conflict-free ways to navigate the divorce process at a minimal cost.
But sometimes, it’s not so simple. Perhaps you need to hire a family law attorney to go to court for you. Maybe there’s a lot at stake, and things aren’t as clear cut.
Below are some of the types of divorce professionals you might consider (or who might be recommended to you):
Accountant: Forensic accountants are often hired by divorce attorneys to value businesses, track down hidden assets, or estimate the value of pensions.
Private investigator: Private investigators might be required to help you uncover hidden assets, or other financial resources that your spouse could be hiding.
Family law attorney: If your ex-spouse is hiring one, you probably should, too. If you’re a victim of domestic abuse or if you don’t have financial resources to afford an attorney, many states, counties and cities have pro bono programs where family law attorneys can help you for free.
Therapists & counselors: There might be children who need counseling through the divorce process. Perhaps you need help that your marriage counselor couldn’t provide. There are therapists who specialize in serving the unique needs of people going through the divorce process.
Financial planners: There are financial planners who are specially trained to help address the financial challenges you encounter throughout the divorce process. You can recognize these individuals with the Certified Divorce Financial Analyst® (CDFA) designation. Many financial planners charge a reasonable hourly rate for their services.
If you find yourself struggling to make financial sense of your divorce, you should consult with a financial professional that specializes in divorce work. Working with a Certified Divorce Financial Analyst® is a good way to take that first step towards a more financially sound future.