How do you prepare for divorce? Certainly, it's not something most spouses want to consider, especially while they're building a life together - raising kids, buying a home, saving for a dream retirement.
But as one in two husbands (or wives) can attest, half of all marriages end in divorce. It goes without saying that divorce can wreak havoc on one's emotions. Yet it can pack a mighty big financial blow, too. In fact, one of the leading causes of divorce is money. Ironically, your financial woes may get worse after you split with your spouse. That's true for both husbands and wives - though women have traditionally fared worse. (Roughly 21 percent of them live below the poverty rate after a marriage splits up vs. 9 percent for men.)
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That said, traditional divorces are changing. These days, many marriages have both spouses working, each of whom may have his or her own retirement savings and investments. Individuals who marry later may bring more assets to a marriage - including their own homes. As finances grow more complex, it may be even more important to think ahead to ensure you get what's yours without blowing your wallet on a protracted, nasty divorce settlement. These days, court fees and legal costs for both spouses run roughly $20,000, according to a study conducted last year by Money magazine.
That's why planning ahead is so important. Too frazzled to know where to start? Read on:
Gather your financial records.
Men look at divorce as a business deal, and women look at it as a termination of an emotional relationship. It's a tremendous distinction.
National Center for Women and Retirement Research
A marriage is more than just a blending of lives; it's also a blending of finances and assets. It may be clear that you own the valuable oil painting in the living room, but what about savings in your joint account or the house? You also can get in trouble if a card is in your name but you get him or her a supplmental card for your spouse.
You can protect your interests if you know well in advance what you and your spouse own. Make sure you've got records on such things as the brokerage and bank accounts, insurance plans, a copy of the mortgage, retirement funds, the car registration, pensions from a spouse's job (or previous work) and the like. You'll also want copies of tax returns. Some pros advise having receipts (if possible) and photographs of valuables, jewelry and antiques. (If you don't keep good records, start now. See "Organize your home office" for organizing tips.)
If you believe your husband or wife is squirreling away assets keep an eye out of things like big cash withdrawals from the savings account and new accounts (especially those being opened in kids' names).
Likewise, if you're thinking about stashing away assets, be aware that plenty of spouses have been caught and the courts frown on this. You may end up paying a bigger settlement had you played fair.
Check your credit report.
You may be a spendthrift, but if your spouse has lousy spending habits, watch out. You're generally going to be responsible for debts that were incurred during your marriage - even if you weren't the one using the credit card. What's more, a spouse's bad habits may put a huge black mark on your own financial future, especially if he or she's run up bills on jointly held credit cards.
Avoid surprises by monitoring your credit report. Check with one of the three following credit agencies: Equifax, TransUnion and Experian. You can get a report for free if you've been denied credit in the last 60 days or you live in certain states, including Vermont, Colorado, Georgia, New Jersey, Maryland and Massachusetts.
If you're worried a spouse may run up thousands of dollars in debt, close out joint accounts so he or she can't use credit cards.
Build your own credit.
While divorce no doubt affects both husband and wives, stay-at-home wives have traditionally fared worse for divorce than their husbands because they've got two challenges; dealing with the emotions of a divorce and joining the workforce after years of staying home. That said, it's vital to gain your own financial footing as soon as possible.
Start with building your own credit. If you don't have a credit card or savings account in your own name - now's the time to get them. If you can't qualify for a credit card with a major lender, get a department store credit card, which often are easier to qualify for, said Martin M. Shenkman, an estate attorney and author of Divorce Rules for Men.
If you're the spouse who's been supporting the family, balancing the books and holding the credit cards, help your spouse get on his or her feet, urged Shenkman. The sooner they can support themselves and contribute to the kids' support, the less you may end up paying in the long run. To get an estimate of what college will cost, use the college cost calculator.
"How is someone supposed to feel if she wakes up one morning and has no credit cad, no credit history - no idea how to pay a bill. That's not an exaggeration. It happens," Shenkman said. "If you put the screws on someone it only increases anger and the legal system may make it more expensive for you."
If you aren't working and heading for divorce, you'll soon need to hit the job market. While a divorce is emotionally draining, try to take on the task of regaining your financial strength. Dust off your resume if you have one, see a career counselor and take steps to make yourself financially independent.
Hire the right attorney.
Divorce fees can run a couple hundred dollars to hundreds of thousands of dollars depending on the attorney you hire. No, we're not talking what your lawyer charges per hour. We're talking about the effectiveness of your counsel.
A lawyer that feeds your anger is sure to prolong the process. That will drive up costs. A lawyer who's effective will aim to get you a fair settlement as quickly as possible.
Use references to start searching for a lawyer and use lawyer directories, such as the online search engine at Martindale-Hubbel, where you can look for lawyers in your city.
When you interview a prospective lawyer, make sure you know how long he or she has been in the field. Ask about their typical client. You don't want a lawyer who's not used to handling divorces that have far fewer (or more) or assets than yours. Ask to see a sample of a typical bill and understand how a lawyer charges fees.
Craft the divorce settlement carefully.
If you're the breadwinner for the family, expect to pay some sort of alimony to support your spouse. Lump-sum payments can't be changed in the future. Rehabilitative alimony is paid to support a spouse who may be entering the job market, and can be changed. Reserved alimony payments are given to a spouse for a certain period of time but may be renewed or changed in the future.
If you and your spouse can't agree as to what you (or she/he) needs for support, consider using a third party, such as an accountant, to review expenses and make a budget that's based on objective numbers, not emotions. Think about future costs, too, so big expenses are covered by both spouses. The cost to raise a child by the time he or she is 17 runs jsut over $165,000 for middle-class families, and nearly $242,000 for wealthy families who's income is about $96,000 a year, according to recent study by the U.S. Agriculture Deparment. If you've got custody of the kids, make sure you'll be able to cover the bills.
"We've heard story after story of women taking on two or three jobs after they were divorced because they hadn't negotiated joint payment of their children's college education," said Christopher Hayes, director of the National Center for Women and Retirement Research.
Of course, splitting assets in two can be misleading depending on what's being doled out. For example, a wife may opt for the home and give up access to her husband's pension or 401k. But 60 percent of women who get the home end up having to sell because they often don't make enough to keep up with payments after the divorce is settled, waned Hayes.
At the same time, earnings from a 401k are taxable, while profits from a home are tax-free up to $250,000 per person (and $500,000 per married couple.) That may or may not make the retirement fund a better deal. Before you decide what you're willing to give up, see a tax pro or financial advisor for guidance. They often have the knowledge to help you make better financial decisions than a lawyer with no tax experience.
Be careful if you live in a community property state
If you live in Arkansas, Califronia, Idaho, Louisianna, Nevada,New Mexico, Texas, Washington or Wisconsin you live in a so-called community property state where assets that have amassed during your marriage will be divided equally between you and your spouse. (Each state has its own rules regarding divorce.)]
In some states, the husband or wife who earned less may qualify to get more -- up to 60 percent. And in some places, you may be able to keep what's rightly yours if you and your spouse sign an agreement that identify which spouse owns specific assets.
It's understandable if you want to get every penny you can from a divorce, especially if you blame your spouse for destroying your marriage. But approaching the process in a fair, civil manner may end up costing you less in the long run, said Shenkman.
Fighting between estranged spouses delays divorce proceedings, and drives up legal costs, which can be considerable when attorneys charge hundreds of dollars an hour. Moreover, becoming embroiled in a nasty fight is bound to have ancillary effects. If you're too busy fighting your husband or wife you may end up being less productive at work, and that could cost you your job, promotions or other opportunities. It also goes without saying that contentious battles hurt children, too.
"An initial decision has to be made. Are you going to be fair and above board and reasonable - or the opposite?" said Shenkman. "When anger takes over and common sense goes out the door, it hurts the kids, the spouse, and it destroys everyone financially."