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you Afford to Divorce?
Money or lack
is one of the biggest stressors in marriage.
It is also a huge stressor when people consider divorce. And for good reason. Many families find it hard to make ends meet
when the couple lives together and all the income is applied to supporting one
home. When the couple divorces, there
are two homes to support with the same amount of income.
do? Be candid with the professional whom
you are consulting. If it’s a lawyer,
bring your financial records to the first appointment. These include a couple of years of income tax
returns, including W-2’s, 1099’s and all schedules and a list of debts and
assets. For the debts, actually list the
credit cards debt and the interest rate that each account is charging. If you have a home equity loan on your house,
record the interest rate for that as well as the mortgage. Bring your property tax statement and recent pay stubs for both spouses, if they
are available. Recent retirement account
statements are also helpful.
can review your financial situation and provide you with a plan to divide your
family into two households. The lawyer,
if collaboratively trained, may also suggest that you work with a financial
specialist to bring about the separation so you both can survive.
couples, the marriage has broken down so severely, that continuing to live
together is not an option. However, they
need to develop a plan for when they separate.
some options? 1) Look at spending. Some people over-spend due to depression or
anxiety. If the condition of the
marriage is encouraging spending (retail therapy), facing the dysfunction in
the marriage can provide immediate relief.
Often when people realize they are buying clothes, toys, travel,
whatever to avoid facing their problems, they find more constructive and less
expensive ways to soothe their depression.
Consider cutting down home expenses.
This may include liquidating assets.
Perhaps you and your spouse have purchased too large a house or too many
toys to be supported on your income. The
financial specialist or your lawyer can help you review the steps for reducing
the expenses. For example, you may need
to sell your home or toys. If you have
both a home equity loan (usually at higher interest than a long-term mortgage)
and a mortgage, a refinance may help reduce the payments. If you have a 15 year amortization mortgage,
perhaps now is the time to refinance to a 30 year mortgage and reduce monthly
payments. In some cases, where the home
is worth significantly less than the mortgage, it may be time to consider
selling on a short sale or consider turning the house back to the bank.
3) Work out credit
card debts. If you have little chance of being able to
pay off your credit card debt, your financial specialist may be able to refer
you to work out professionals who can contact your credit card administrators
and develop a plan to pay a portion of the real debt in return for forgiveness
of the balance. Be sure to talk with the
specialist about the tax ramifications of debt forgiveness.
4) Consider family
resources. Sometimes family members can assist you in
paying off high interest loans, such as credit cards, in return for you paying
them back in lower interest loans. For
example, your parents may consider lending you $10,000 to pay off the credit
card that is charging 33% for a 7% interest loan. That represents a substantial savings to you,
while providing a reasonable return on investment to your parents. You need to honor the debt, even if they are
5) Using retirement
funds. Some retirement plans permit you to
borrow. You need to repay the debt over
5 years. The downside is that you are
repaying pre-tax dollars with post-tax dollars.
The upside is that you are borrowing from yourself. Also, the money that is out of your
retirement account on loan to you will not be accruing interest or
People who divorce are
permitted to access retirement funds in ways that people who stay married are
not. Using Qualified Domestic Relations
Orders permits the spouse who has retirement savings to transfer a portion of
the savings to the other spouse without having the money that is transferred
taxed to the transferring spouse. This
permits the receiving spouse to either hold the retirement money in a
retirement account, such as an IRA. Or
the receiving spouse can withdraw the money without a penalty and pay
bills. In some divorces, we orchestrate
bill paying by using these QDRO’s.
However, the spouse who withdraws the money to pay bills will have to
pay taxes on the money that is withdrawn.
So careful planning is required.
6) In severe cases,
bankruptcy may be an option. There are
Chapter 7 bankruptcies which allow you to get rid of all of your debt, with the
exception of obligations that you may have from a prior divorce, or student
loans or taxes. There are also Chapter
13 bankruptcies that permit you to pay a portion of your debt according to a
plan approved by the court.
Some people are just not
good financial partners. Many people who
seek divorce have serious financial problems.
Many have resisted getting divorced due to these problems. However, while they try to figure out what to
do, the financial situation deteriorates.
If your finances are
stressing you and your marriage and you have hope that the marriage can be
preserved if the stressors are reduced, see a financial consultant. Many credit unions offer this service at
little or no cost. Develop a plan and
then stick with it.
If you feel that your
marriage has deteriorated too far, or that you and your spouse are financially
toxic together, then confer with a lawyer. Select someone who is trained as a
collaborative professional. That lawyer
can refer to you a financial specialist who can help you and your spouse
consider the options that make sense to you to relief the situation.
Doing nothing typically does
not help you. If finances are making you
and your spouse miserable, do something to try to get relief.