Why Be Financially Prepared for Divorce?
A divorce may be the most detrimental event of your life. It may also be the most liberating and empowering. Either way, you need to be financially prepared. Here are a list of common questions I get about preparing for your divorce as well as my response, which I hope you find helpful.
Why is it important to be financially prepared for divorce?
There are a lot of reasons to be financially prepared for a divorce. First, support. If you need child and spousal support, it may take a few months before these payments commence. Why? Because once you file the Petition for Dissolution of Marriage, the other spouse may not be willing to make these payments voluntarily. A court hearing may be required and you may not be able to get a court hearing for several months out. Or, if you or your spouse own a business and get income from investments and the like it may take several months to determine the income available for support. You may not know your living expenses as well because maybe the other spouse pays the bills. The bottom line on being financially prepared is, ideally, you have six months living expenses saved; but, a lot of people with children do not have this much saved in cash so investment and retirement type assets may need to be liquified or funds borrowed from family members. All of these avenues are fine to utilize; and, you want to make sure you have them available to you to minimize one more stressor in an already stressful situation.
As to property division, you need to understand your assets and debts and how they may be split to give you an idea of where you will live and what you will have available to live on. Talking with your CPA and your financial planner are strongly advisable before filing for divorce as well as your divorce attorney for pre-divorce planning. If you are what we consider the “out” spouse, meaning you were not as involved, or involved at all, in the financial matters in the marriage this may be an intimidating step; but, a good divorce attorney can get you to the necessary people to help you understand where you are and where you are going.
What should you do to understand your current financial system?
This can be a really hard question to answer if you are the out spouse as set forth in the previous question. A good place to start for both the “in” spouse and “out” spouse regardless is to look at your bank statements, credit card statements and tax returns. These documents provide a good starting point for determining how much you are spending each month and what your needs are. I utilize a forensic accountant in my law practice to determine income available for support and marital standard of living; I think the use of his services is appropriate in every case. But, you can get a good start on your own with looking at the bank and credit card statements and being mindful of your spending. An added layer of complexity is if there is a business, or businesses, and monthly expenses are paid from the business.
What financial documents should you have on hand, and why?
If you executed a cohabitation agreement, premarital agreement or post marital agreement then have a copy of these documents. If there is a trust, then a copy of the trust as well. Tax returns because you need to know your income. Try to have at least the last three years of tax returns if the marriage is longer than five years. Current bank statements. Current statements for investment and retirement type accounts and current credit card statements. If you are the “in” spouse with a business, then your profit and loss and general ledger as well. Even if you are the “in” spouse and you do not have a profit and loss and general ledger for your business, that is fine as these can always be created from your QuickBooks or similar accounting software.
Should a stay at home parent get a job before getting divorced?
This is a really hard question to answer as it depends on the age and circumstances of the children. If the stay-at-home parent can work part-time or full time without interfering with the needs of the children then it is probably a good idea. The reason why is two-fold. (1) Security: if the stay at home parent is working, he or she will have at least some income every month in the instance it takes longer than anticipated to secure support orders or the other side just refuses to pay. (2) Imputation: in California, a non-working spouse can be imputed with income. A vocational examination may be conducted and the non-working spouse may then be attributed, or “imputed” as we call it, with the income that he or should could theoretically earn. If a spouse is already working at his or her full capacity either part or full time, then there is no need to speculate as to how much he or she could earn following a vocational examination.
If you have been out of the work force for a while and/or you have young children, it may be worth while to update your resume with some classes at a community college or university extension. This shows the Court that you are trying to become self-sufficient and, for the reasons set forth above, gets you on track to some financial security.
How can you determine your earning potential?
As set forth above, you can participate in a vocational examination. This is a comprehensive analysis resulting in actual job recommendations most times.
How to create a budget?
This is a hard one going through a divorce because there are so many unknowns, especially if you are the out spouse. But, looking at your bank statements and credit card statements as set forth above can really help you to understand your needs and wants and plan accordingly. A family law attorney will talk with you in more detail about managing your expenses as well.
How can a financial advisor help you manage your money?
You can work with a financial advisor to map out a budget and begin, or continue, planning for the future. The financial advisor can then keep you on track moving forward and offer you support if you find yourself getting confused or overwhelmed.
This material is provided for educational purposes only. Providing this information does not establish an attorney/client relationship. None of the information contained in this newsletter should be acted upon without first consulting with an attorney. Should you have questions about the content of this newsletter, please arrange to discuss via a consultation.