Financial Issues when Divorcing

Divorce affects every aspect of your life. The reality is that your lifestyle is bound to change, and often not for the better. Make sure that you do all you can at the outset to minimize the financial damage.

With this in mind, you will need to carefully think through all your financial decisions. If possible, it is best not to make any major purchases, such as a new car, or another residence. Before making any kind of large purchase consult your attorney. It may have a direct bearing on your case.

How to minmize financial damage of divorce

• Know your state laws regarding division of property - assets as well as liabilities.
• Evaluate what you have.
• Consider the tax consequences.
• Negotiate fairly.

Hard as it may be, you should try to treat the financial part of your divorce as if you were splitting a business. Don't let your emotions interfere with your financial decisions. You might love your home, but the reality may be that you simply cannot afford it any longer. Another costly mistake people make is to seek revenge through the finances. No matter what you may think, you are not entitled to everything. There are guidelines that are followed for splitting assets and determining child support and alimony. If you take the stance of "I'm going to wipe him/her out" you will probably end up wiping yourself out as well. Everybody loses in that situation.

It is in the best interest of both parties involved to cooperate fully when it comes to financial matters. If you can't agree on financial (or any other) issues, you will end up in court with a judge making the decisions. Judges don't care about the emotional issues of your divorce when making financial decisions. Generally, they don't concern themselves with issues such as tax consequences either. That reason alone should be sufficient motivation to negotiate as much as you of your settlement as you can.

SOCIAL SECURITY

Benefits For A Divorced Spouse
A divorced spouse can get benefits on a former husband or wife's Social Security record if the marriage lasted at least 10 years. The divorced spouse must be 62 or older and unmarried. If the spouse has been divorced at least two years, he or she can get benefits, even if the worker is not retired. However, the worker must have enough credits to qualify for benefits and be age 62 or older. The amount of benefits a divorced spouse gets has no effect on the amount of benefits a current spouse can get.

Survivor Benefits
Unmarried children under the age of 18, (up to age 19 if they are attending elementary or secondary school full time) are entitled to survivor benefits if your former spouse passes away. The child would also be entitled to survivor benefits if he or she was disabled before age 22 and remained disabled. Under certain circumstances, benefits can also be paid to stepchildren, grandchildren, adopted children, or dependent parents age 62 or older.

Benefits for Surviving Divorced Spouses
If your former spouse passes away, you can get benefits under the same circumstances that your former spouse's widow or widower would get if your marriage lasted 10 years or more. You do not have to meet the length-of-marriage rule if you are caring for your child who is under 16 or disabled and who is also getting benefits on your Social Security record. The child must be your former spouse's natural or legally adopted child.

Benefits paid to a surviving divorced spouse who is age 60 or older (50-60 if disabled) will not affect the benefit rates for other survivors getting benefits.

WILLS

No Will

If you created a will before you were divorced you should contact an attorney to update it.

In most states the law is that any stipulation in the will for the benefit of your former spouse is interpreted as if your ex-spouse had predeceased you.

In some states divorce revokes the whole will. In either case, the former spouse has no rights in your estate as a beneficiary, executor or administrator.

There are however a few states where the will stands and the former spouse may recieve an inheritence.

These rules only apply to the ex-spouse. If your will includes your ex's children or other relatives it is not wholly revoked by the divorce and those provisions of the will still stand. The divorce has no effect on them.

If you created a will before your divorce and specify that you intended the provisions for your soon to be ex-spouse to be valid after the divorce then the law is overruled.

CREDIT

Often the financial issues related to your divorce can have an adverse effect on your credit score. While it is sometime unavoidable that your credit rating is affected, you can take steps to maintain a good credit rating.

Make sure that your bills are paid on time. If you think you will hurt your spouse by not paying your bills on time during the divorce you are right. The only problem is you will also be hurting yourself. If the account is your name only then you are only hurting yourself.

Remember, when you opened your joint credit account you and your spouse became contractually obligated to pay the debt. A divorce decree or property settlement agreement does not change that liability, even if it states that one person is responsible for the debt. If your spouse does not pay the debt the creditor can and most likely will seek payment from you and any late fees or missed payments will appear on your credit report.

If possible work together with your ex-spouse to pay off and close remaining joint accounts. If the divorce decree assigns responsibility for a joint debt to your ex- spouse try to have your name removed from the account.

Get a copy of your credit report. You are entitled to a free credit report from Equifax, Experian, and TransUnion once every 12 months. You can request all three reports at once, or space them out throughout the year. Go over every detail of the report. If there are items or sections of the report you don't understand then call the credit bureau that you received the report from and ask them to explain it to you.

If you believe that any of the information on the report is incorrect, notify the credit bureau. They will you send you a form that you must fill out. They will then verify your information with the creditor and send you an update. If you disagree with the outcome you are entitled to add your own statement to the credit report.

The three major credit reporting bureaus are:

BANKRUPTCY

If you are considering both divorce and bankruptcy there are a few different options for you but it's probably not a good idea to do both at the same time. One reason is that part of the divorce is the distribution of assets and during a bankruptcy proceeding assets are frozen.

Which should you file first?

One reason to file prior to the divorce is if you file jointly then the costs associated with the bankruptcy are shared. Depending on where you file, some states allow double exemptions on assets if you file joint bankruptcy.

However, if you are filing a Chapter 7 bankruptcy your combined income may put you over the income threshold. That may be a reason to wait until after the divorce.

Either way it's best to seek the advice of an attorney before proceeding with both a bankruptcy and a divorce.

Types of personal bankruptcy.

Chapter 7 discharges most of your debts. In some cases, you might have to surrender some of your property. If you own a home you might not have to surrender it if the equity of the home (current value of home minus mortgage balances) is under a certain amount. Some states also allow you to keep clothing, household furnishings, property and other basic items.

Chapter 13 allows you to keep all your property. You develop a plan that allows to repay a portion of your debts through monthly installments based upon your earnings. The plan would be in effect until the debts are paid in full or until the end of a three to five-year period.

Several types of debts are not dischargeable in bankruptcy court such alimony, child support and student loans.

RETIREMENT

Every state is different, but if you or your spouse have a pension or an IRA there is a good chance it will be subject to some form of equitable distribution.

Few areas of equitable distribution seems to strike a chord more than splitting a pension, especially if one party has worked outside the home and the other party has not.

More than likely, if you are young, your retirement funds are not something you give much thought to. Going through a divorce will change that. As with every other decision you make concerning your divorce, what you decide about the division of the pension will affect your lifestyle. The only difference is that you won't feel the effects until it's time to retire. It's important to keep in mind that what was once going to support one household in retirement must now support two. This is a good opportunity to see exactly what you have and what you will needs will be and start planning for your own individual retirement.

Pension plans are complex to say the least. Each plan is different. You and your spouse may be able come to an agreement on how to split it, but to obtain the valuation will require an expert. Depending on the type of plan that you have, the "real" value may differ from the value the court assigns to it.

The value of the pension will also vary depending upon your individual state's laws regarding when the pension becomes qualified for equitable distribution and as of what date the pension is to be valued at. If you had a substantial pension prior to your marriage, that portion of it may be considered a pre marital asset. In addition the date to be used to determine the final value of the pension may be the date the divorce complaint was filed. Your attorney would be able to answer these questions for you.

Pension plans are an asset and can be used as a bargaining chip when negotiating your final settlement agreement. But beware, trading off the pension for an asset may not be in your best interest. Remember the real value of the pension and the values assigned by the court are not always equal. Consult a professional before making any decision to give up your share of the pension.

The QDRO

A QDRO (pronounced 'quad dro' and stands for Qualified Domestic Relations Order) is a special court order that grants a person a right to a portion of the retirement benefits his or her former spouse has earned through participation in an employer-sponsored retirement plan. QDROs are typically prepared during divorce proceedings.

In a Qualified Domestic Relations Order, the person who earned the benefit is the participant and the person who is entitled to receive a share of that benefit is called the alternate payee.

You may wonder why you need a QDRO. It is Federal law that a retirement benefit can only be divided between former spouses if there is a QDRO. So, if a divorce decree issued by a state court clearly states that the retirement benefit should be divided it may not be sufficient.

How to get a QDRO

If you're in the process of a divorce and are working with an attorney, be sure to let them know that there are retirement assets. If you aren't working with an attorney for your divorce it's probably best to hire an attorney for the QDRO. This is one area that you want to be sure is done correctly.

Don't wait to do the QDRO.

Once you have your QDRO submit it to the plan right away. Technically, a QDRO can be obtained long after the divorce decree is issued, it's better to obtain a QDRO and to file the QDRO with the plan as quickly as possible. The plan should let you know within a reasonable amount of time whether it has accepted the QDRO. If the plan accepts the QDRO, you do not need to take any additional steps. If the plan rejects the QDRO, it must provide a clear explanation for the rejection, including information on what you need to do in order to improve the QDRO so that it is accepted by the plan.

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