Money or lack thereof is one of the biggest stressors in marriage. It is also a huge stressor when people consider divorce. And for good reason. Many families find it hard to make ends meet when the couple lives together and all the income is applied to supporting one home. When the couple divorces, there are two homes to support with the same amount of income.
What to do? Be candid with the professional whom you are consulting. If it’s a lawyer, bring your financial records to the first appointment. These include a couple of years of income tax returns, including W-2’s, 1099’s and all schedules and a list of debts and assets. For the debts, actually list the credit cards debt and the interest rate that each account is charging. If you have a home equity loan on your house, record the interest rate for that as well as the mortgage. Bring your property tax statement and recent pay stubs for both spouses, if they are available. Recent retirement account statements are also helpful.
A lawyer can review your financial situation and provide you with a plan to divide your family into two households. The lawyer, if collaboratively trained, may also suggest that you work with a financial specialist to bring about the separation so you both can survive.
For many couples, the marriage has broken down so severely, that continuing to live together is not an option. However, they need to develop a plan for when they separate.
1. Look at spending. Some people over-spend due to depression or anxiety. If the condition of the marriage is encouraging spending (retail therapy), facing the dysfunction in the marriage can provide immediate relief. Often when people realize they are buying clothes, toys, travel, whatever to avoid facing their problems, they find more constructive and less expensive ways to soothe their depression.
2. Consider cutting down home expenses. This may include liquidating assets. Perhaps you and your spouse have purchased too large a house or too many toys to be supported on your income. The financial specialist or your lawyer can help you review the steps for reducing the expenses. For example, you may need to sell your home or toys. If you have both a home equity loan (usually at higher interest than a long-term mortgage) and a mortgage, a refinance may help reduce the payments. If you have a 15 year amortization mortgage, perhaps now is the time to refinance to a 30 year mortgage and reduce monthly payments. In some cases, where the home is worth significantly less than the mortgage, it may be time to consider selling on a short sale or consider turning the house back to the bank.
3. Work out credit card debts. If you have little chance of being able to pay off your credit card debt, your financial specialist may be able to refer you to work out professionals who can contact your credit card administrators and develop a plan to pay a portion of the real debt in return for forgiveness of the balance. Be sure to talk with the specialist about the tax ramifications of debt forgiveness.
4. Consider family resources. Sometimes family members can assist you in paying off high interest loans, such as credit cards, in return for you paying them back in lower interest loans. For example, your parents may consider lending you $10,000 to pay off the credit card that is charging 33% for a 7% interest loan. That represents a substantial savings to you, while providing a reasonable return on investment to your parents. You need to honor the debt, even if they are your parents.
5. Using retirement funds. Some retirement plans permit you to borrow. You need to repay the debt over 5 years. The downside is that you are repaying pre-tax dollars with post-tax dollars. The upside is that you are borrowing from yourself. Also, the money that is out of your retirement account on loan to you will not be accruing interest or dividends.
People who divorce are permitted to access retirement funds in ways that people who stay married are not. Using Qualified Domestic Relations Orders permits the spouse who has retirement savings to transfer a portion of the savings to the other spouse without having the money that is transferred taxed to the transferring spouse. This permits the receiving spouse to either hold the retirement money in a retirement account, such as an IRA. Or the receiving spouse can withdraw the money without a penalty and pay bills. In some divorces, we orchestrate bill paying by using these QDRO’s. However, the spouse who withdraws the money to pay bills will have to pay taxes on the money that is withdrawn. So careful planning is required.
6. In severe cases, bankruptcy may be an option. There are Chapter 7 bankruptcies which allow you to get rid of all of your debt, with the exception of obligations that you may have from a prior divorce, or student loans or taxes. There are also Chapter 13 bankruptcies that permit you to pay a portion of your debt according to a plan approved by the court.
Some people are just not good financial partners. Many people who seek divorce have serious financial problems. Many have resisted getting divorced due to these problems. However, while they try to figure out what to do, the financial situation deteriorates.
If your finances are stressing you and your marriage and you have hope that the marriage can be preserved if the stressors are reduced, see a financial consultant. Many credit unions offer this service at little or no cost. Develop a plan and then stick with it.
If you feel that your marriage has deteriorated too far, or that you and your spouse are financially toxic together, then confer with a lawyer. Select someone who is trained as a collaborative professional. That lawyer can refer to you a financial specialist who can help you and your spouse consider the options that make sense to you to relief the situation.
Doing nothing typically does not help you. If finances are making you and your spouse miserable, do something to try to get relief.