A Guide to the Most Common Financial Issues of Divorce in 2022

Divorce is emotionally, mentally, physically, and yes, financially stressful.

During a divorce, you and your spouse will be forced to make and accept decisions that will have a major impact on your current and future financial situation and well-being. The most important thing to remember? Don’t go into them uneducated and alone.

While many people choose to consult a family law attorney in their divorce proceedings, very few involve the expertise of a financial planner and/or CPA. To understand some of the basics, here’s a guide to some of the biggest financial issues surrounding divorce.

 

Division of property in divorce

One of the first decisions to be made when a marriage breaks up is how to divide your assets.

Who gets the antique mirror your mother-in-law gave you last Christmas? Who owns shares in GE? What about furniture? your car How do you divide assets accumulated over the years?

Liquidated damages can be determined by state law or court order as long as there is agreement and consent between you and your spouse. Currently, there are nine states (AZ, CA, ID, LA, NV, NM, TX, WA, and WI). Community property States. These states have a rule that all property acquired by either spouse during the marriage is considered joint marital property. Common marital property is generally divided equally between spouses in a divorce.

Aside from the specific rules in community property states, there are many other ways to divide marital property. Surprisingly, most people come to a relatively peaceful agreement about the division of property, but if there is a dispute about one or more items, there are many fair ways to decide who gets what.

One of the most common is a sale, where one spouse takes some items for the other. For example, the wife may take the car and furniture so that the husband can get the boat. Another method used in property division is the equal division of the proceeds from the sale of the marital property. Often mediators or arbitrators may also be used.

Be sure to familiarize yourself with the laws governing the division of property in your state. You can find information for your state at DivorceNet.com.

When it comes to assets such as houses, there are special considerations you may want to consider, especially if you are looking to buy a new home during a divorce. Make sure you know the legal requirements and restrictions so you don’t end up on the short end of the stick.

 

Dividing debts in divorce

Often more difficult than dividing assets in a divorce is deciding who is responsible for any debts a couple incurred during their marriage. To do this, you need to know how much you owe and to whom.

Even if you trust your spouse completely, do yourself a favor and order your credit report from each of the three credit reporting agencies: Equifax, Experian and TransUnion. Your credit report will break down all debt in your name, including joint accounts you share with your spouse.

Go through your credit reports and identify which debt is shared and which is in your spouse’s name only. At this point, it’s important to stop the debt from piling up while you’re going through the divorce process. The best way to do this is to cancel joint credit cards, leaving one card in your name in case of an emergency.

Once you’ve identified your debts and taken steps to keep them from increasing, it’s time to decide who is responsible for which debts. There are many ways to do this, including:

    • If possible, pay off the debts now. This is the cleanest method if you have savings or assets that can be sold. You don’t have to fear that your spouse will hold you responsible for the debt part and you can live your new life debt free.
    • Agree to take responsibility for debts in order to receive additional assets from the division of your estate.
    • Agree to allow your spouse to take responsibility for debts in order to receive additional assets from property division.
    • Agree to share responsibility for debts equally. Although at first glance this choice is very “fair”, it leaves both of you very vulnerable. Legally, if your ex-spouse doesn’t make any payments, you’re still responsible, even if he/she signed an agreement to take responsibility for the debt.

 

 

Tax issues in divorce

People sometimes get too caught up in the obvious and talk about divorce issues like property and debt division, child custody, etc. Because of this, many do not consider the tax implications of a controlled divorce, which can cost thousands of dollars or more.

This is where having a certified public accountant (CPA) as part of your divorce team comes in very handy. Tax issues that may arise as a result of a divorce may include:

  • Who is exempt from tax for dependents?
  • Who can claim family responsibility?
  • Which attorney fees are tax deductible?
  • How can you be sure the “repair” fees are tax deductible?
  • How to avoid a mistake if child support is not deductible?

Of course, as tax law changes and your particular situation may require special attention, be sure to consult a tax professional.

 

Retirement planning issues in divorce

If your spouse has retirement savings, you are probably entitled to half, by law.

This money can be used for your own retirement or home down payment, moving expenses or other current expenses. To avoid the 10% early withdrawal penalty, be sure to follow IRS rules.

The main issue with the division of retirement assets is that while the assets may or may not be sufficient for your joint retirement needs, your individual retirement needs may be greater. As a result, you must consider not only how these assets will be distributed, but how you will continue to contribute to them in order to protect your financial future in retirement (your immediate future may also be in question).

 

Educate yourself

Divorce can cause serious problems for some people, and you should know that even the most honest people can try to cheat when trying to create a financial situation in a divorce. Spouses may underreport income, ask an employer to delay a large bonus or salary increase, among other dishonest behaviors. The most vulnerable are those whose spouses have closely held businesses.

Knowledge is the best defense when facing the financial problems of divorce. It is especially important that both spouses educate themselves about their joint finances, so that nothing remains a secret. Ignorance is not bliss when it comes to divorce.

 

Other resources for divorce financial matters

For more information on how to handle these financial issues, see How to Cope with the Financial Impact of Divorce, which also includes discussions about child support and alimony.

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