Financial Issues when Divorcing

Divorce affects every aspect of your life. A large part of your life that changes is your financial situation. A reality of divorce is that your lifestyle is bound to change, and not for the better. The sooner you can accept this reality, the better off you will be. It may not be permanent, but chances are it will, especially if there is a large disparity between salaries and earning potential. 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. During a divorce is not the time to act impulsively.

You can also save a lot of money by doing the following:

• 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 running 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
Laws vary from state to state on who is entitled to an inheritance, and in what percentage of the estate they are entitled to, when there is no will. A general rule of thumb is that the surviving spouse will inherit the entire estate if there are no surviving children. If there are surviving children, then the children are usually entitled to two thirds, with the surviving spouse inheriting the remaining one third. If there is no spouse then the children would be entitled to the entire estate. Remember that spouse indicates current spouse not ex-spouse.

CREDIT

Of all the assets that you have the one you are least likely to protect is your credit rating. It is very easy to let your credit rating deteriorate during a divorce. You might not think maintaining or establishing a good credit rating in your name is very important, you will one day find out exactly how important it is to your financial well-being. Under certain circumstances it is sometimes unavoidable that credit rating is affected, but you can take steps to maintain a good credit rating.

1. Get a copy of your credit report. Depending on the state that you live in you may be entitled to a free copy every year. Get a copy from each of the major credit bureaus as the information may vary from credit bureau to credit bureau. 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.
2. 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.
3. 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 you are absolutely 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. Your actions of not paying or paying late will remain on your credit report for the next seven years.
4. You can place a fraud alert on your credit report. If you are willing to give up the opportunity to get instant credit you can notify both Trans Union and Experian credit bureaus to add a statement to your credit report requesting creditors not approve new accounts without calling you first. This will protect you from people opening credit accounts in your name. Unfortunately, Equifax does allow you to add this statement to your credit report unless you are already the victim of fraud.

A credit report is information compiled about your credit payment history. All accounts in your name or any account opened jointly by you and your spouse after June 1, 1977 will appear in the report. If your spouse has an individual credit account and has authorized you to use it, that account will also appear in the report.

Banks, retail stores, credit card companies and other lenders report to credit agencies. Public record information such as tax liens, bankruptcies, or judgments against you also appear on your credit report.

Federal law regulates who may access your credit report and the reasons for accessing it.

The three major credit reporting bureaus are:

BANKRUPTCY

Consult a bankruptcy attorney as to the implications of filing for bankruptcy. The implications can last for 10 years and may not be in your best interest depending upon your circumstances and the results you were looking for.  Bankruptcy is not always the easy way out of debt or your best solution.

Several types of debts are not dischargeable in bankruptcy court such alimony, child support and student loans. In addition if you and your spouse are jointly named as a debtor only you will discharged from the responsibility of paying the creditor. But, if your divorce settlement states that you are responsible for any part of that debt, then your spouse can collect from you the portion that you are responsible for if the debt is paid.

There are primarily 2 types of personal bankruptcy, Chapter 7 and Chapter 13.

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.

NOTE - There is currently legislation before Congress in regards to bankruptcy laws. Please consult a Bankruptcy Attorney as to the status of the proposed law changes and the impact it could have on your case.

For more information about Bankruptcy and debt management go to DebtRiddance.com

RETIREMENT

Every state is different, but if you and/or your spouse have a pension there is a good chance it/they 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 need for your retirement 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 Quandary

A QDRO (pronounced 'quad dro' and stands for Qualified Domestic Relations Order) is a separate court order awarding a share of the pension to each party in the divorce.

Immediately upon filing for your divorce you must take action on the division of any pension that qualifies for equitable distribution. As the beneficiary of the plan you should contact the plan's administrator and request of the summary plan description. Once you obtain this description you can determine your rights under the plan. Each plan is different so you must find out the specific requirements of the pension in order to acquire your portion. It is your attorney's responsibility to prepare the QDRO. If the QDRO is not prepared according to the plans specifications it will not be honored. This will cost you additional money in attorney fees as well as putting your distribution at risk.

It is very important that all pension issues be settled before the divorce is final. Even if the pension is included in your settlement agreement and you don't get the QDRO when the divorce is finalized you will have to go back to court to obtain it. This may be putting your share of the pension at risk. In a recent court decision (Hopkins v. AT&T Global Information Solutions Co. No. 96-1363, US Court of Appeals, 4th Circuit, January 24, 1997) if the QDRO is not prepared and submitted until after the divorce, and your former spouse remarries and retires before the submission, the QDRO may not be enforceable. His or her current spouse would become vested for the surviving spouse benefit.

Divorce: How to help yourself and your finances

by Sarah Pennells

Divorce is not only becoming more common, it is becoming more complicated too. Unravelling joint finances can be a major headache and there is often uncertainty - on both sides - about what each party may be entitled to.

This book offers anyone contemplating divorce a practical, step-by-step guide to what they can expect. It will include important issues such as: key milestones in the divorce process; how to work out what your assets are worth; what happens to joint debts; how to keep divorce costs to a minimum; what to do if you own a business jointly.

The Financial Intelligence series offers down-to-earth, practical guides to personal finance, aimed at anyone interested in increasing their financial IQ. These guides will help readers to feel confident about making the right decisions when it comes to spending, saving and investing their money.

Additional Divorce Resources:

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