Protecting Your Financial Interests in Divorce Proceedings
Divorce may be one of the most damaging financial events in the lives of those who go through it, but that isn’t always immediately clear to a couple about to split up.
In fact, the first response is probably emotional- whether exhaustion and sadness at having failed to save the relationship after years of struggle or shock when your spouse walks out. Then, perhaps comes the resolve to shield the children.
There will be many decisions to make and one of the first you will have to face will affect how much you spend on legal fees. Should you try mediation, which can be relatively low cost, or a newer process known as collaborative divorce? Or should you just go for the bare knuckles approach?
Should you get sucked into the legal vortex and the cost and the complications of setting up a second household, it becomes easy to lose sight of longer-term financial concerns. The list of things to think about ahead of time, from health insurance to your credit history to taxes, turns out to be much larger than you might think. People often neglect or fail to consider them beforehand.
One may be willing to pay any price to remove yourself from a toxic marriage with the least amount of haggling. Many, however, are probably seeking an equitable split, but have no idea what to budget or evaluate. This list is a great place to start.
Health Insurance: If you are on your spouse’s health insurance plan you will not be able to use it once yo are no longer married. The government’s Cobra rules allow you to continue coverage for up to three years, but you are responsible for paying the premium yourself, which may not be affordable once you’re shouldering rent or a mortgage alone.
Some of those who are older or have pre-existing conditions find that they can’t get health insurance at all. Whatever your situation it is best to know what insurance will cost you before the divorce is final. That way you can negotiate a settlement that covers the premium or find cheaper housing so you won’t have to do without health insurance.
Mental Health: Barbara Shapiro, a financial planner and divorce specialist with the llMS Financial Group in Dedham, Mass., refers to the desolution of marriage as death without a body. The mourning and trauma that results for you (and your children if you have any) may make therapy necessary.
David Wanderman, who got divorced earlier this decade and has seen a therapist for many of those years since, said this is not a place to skimp. “The reality is, I kind of have no choice.” he said. “These are things that are bigger than myself, and I am not equipped to understand them.”
Credit: It is easy to let the bills slip when you are huddled with lawyers and no longer speaking to your spouse. But letting things slide can do lasting damage to your credit, and it can happen in a number of ways.
Liz Pulliam Weston, author of”Your Credit Score: Your Money and What’s at Stake,” suggests canceling jointly held credit cards and transferring any balance that a spouse is responsible for to a card in that spouse’s name.
You should also try to get your name removed from any mortgage if you are no longer responsible for the payments. If your spouse pays late, accidentally or on purpose, it will hurt your credit. That will complicate your ability to refinance, get a new mortgage or apply for an auto loan when you’re on your own.
Hired Help: Once there are no longer two of you around, you may have to hire others for everything from yard maintenance and home repair to babysitting. This cost should be part of your budget- and negotiations.
Keeping House: When a couple splits, one member of the household often has a strong desire to keep the family home, perhaps to provide some continuity for the children. After a few years of being house rich and cash poor, however, reality sets in and the house goes up for sale.
The problem at that point, according to Donna Cheswick of BPU Investment Management in Greensberg, PA., is that you are solely responsible for all of the costs of selling, including paying the real estate agent and sprucing up the house. So it is best to be brutally realistic before the divorce is final about the costs of staying in your house.
Taxes: Once someone buys that house, there may be capital gains taxes to pay if it has appreciated more than $250,000. This may seem like a high class problem in this market. But, if you have decided to sell before the divorce is final, you and your spouse might have had a $500,000 exemption from capital gains instead of just half that.
In general, it’s crucial to consider the after-tax value of everything, fi·om retirement accounts to deferred compensation when splitting up assets. Annette Brown, a divorce specialist in San Francisco, also noted that judges sometimes failed to consider which spouse could best benefit when awarding the right to future tax deductions and credit relating to the couple’s children.
Spousal Education: Haven’t worked for a while? You may need retraining or a new degree entirely. Gary L. Zaugg, a financial planner and divorce specialist in Virginia Beach, noted that some divorce settlements assumed that a few years of alimony ought to be enough to pay for this. lf you expect the costs to be steep, however, they probably ought to be a separate line item in the settlement or at least part of the negotiation.
Teenagers: If you have joint custody of your children, you may end up buying computers, clothing and other items for their second residence. What many couples do not anticipate of budget for if their children are small, however, are the extra costs of the teenage years.
Disagreements about what is truly necessary are practically inevitable. If you don’t want your child to do without, you may end up paying the full bill for all sorts of new costs, according to Lori Donlan of Morgan Stanley Smith Barney in Pasadena, Calif.
She ticked off the following list for starters: prom expences, cheerleading, sports gear, cars and car insurance, allowance and college visits and applications. The actual cost of college is a big one too. And lets not forget cell phones.
Future Legal Costs: Even after tallying up all of the above, you still have to consider that years later, your spouse may come after you for more money or try to pay less after a job loss. Then you are liable for another four or five figures in legal fees.
While you may not want to earmark emergency funds just for that, the larger point is this: Long after you move on emotionally, divorce may haunt you financially.
This is not a reason to stay in a marriage that is making you miserable. It’s just a reminder that without a lot of planning while you are in the middle of it, divorce may never have a happy financial ending.