Avoiding The Pitfalls Of Divorce Financial Planning

Karen Sparks

By Karen Sparks | Nov 13th, 2018

As you begin to unravel the nuances of dissolving your marriage, remember that the watchwords are focus and details. Feelings of anger, frustration and a haunting sense of being constantly overwhelmed are valid but continued reliance on these emotions will result in decisions that may not be in your best interest at the end of the day.

The following considerations will help to give you a jumpstart to gradually replace your emotional response with a checklist of important and meaningful planning objectives.

Budget Basics

1. Sustainability

Whether you remain in the marital household or you find yourself on the hunt for alternative housing, all roads lead to the critical task of setting up your budget. In the marital relationship, there is often not a need to fixate on the minute issues of everyday living. But in divorce, this is the new reality.

You first start with housing costs. If you remain in the residence you may be responsible for mortgage payments and/or other carrying charges associated with day to day living and these should be detailed out in a line item budget. The same process would apply if you will not be staying in the residence and in this case, you need to do some research on rental housing prices–keeping in mind that you will definitely be downsizing so your approach should not be to replicate the exact same living environment that you had during the marriage.

The easiest way to do this is to use an income and expense worksheet and/or online tools such as Mint and PocketGuard.

2. Accountability

It is extremely important to know what is in your credit profile and your spouse’s credit profile. You should potentially pull the relevant reports from all three credit reporting agencies: Equifax, Experian, and TransUnion. You can also get started on this by using online resources such as Credit Karma. This is important not only for making sure all liabilities are accounted for from the marriage, but it is also vital in providing the foundation for you to determine the viability of your creditworthiness for future financial endeavors such as car purchases, credit checks for rental housing, home purchases etc.

An effort should be made to ascertain all of the active banking and savings accounts utilized during the marriage and then steps should be taken for both parties to establish separate accounts and gradually move toward dissolving joint accounts. It may be necessary to maintain one or at the most two joint accounts due to existing setups for recurring costs that will take some time to unravel. Pay special attention to established protocols for direct deposit payments, automatic deposits to savings accounts from payroll etc.

If you do not currently have a credit card account in your own name, it is prudent to apply and try to establish an account while you are still married even though you are in the divorce process. During this time, you will still potentially have assets and other qualifying accounts that will help you get approval. If this is done post-divorce, your income picture may have shifted downward if you were the low or no wage-earning spouse and thus, your creditworthiness is not as strong.

On this same theme, take stock of all credit-based accounts from the marriage. It will be important to determine which party will retain responsibility for maintaining and/or paying off existing balances and then make the relevant changes to convert the account from a joint account to one that is in the name of the party taking over that account. If your credit finances are set up with authorized signors, immediate attention should be given to removing these designations so that unauthorized expenditures do not occur.

3. Overlooked issues regarding support payments

In most states, there is a basic formula for determining the amount of spousal/alimony/maintenance payments and child support payments.

However, there are often additional items that need to be discussed and agreed between the parties to determine the percentage participation between the payor spouse and the receiving spouse. Some of these issues include:

Asset Assumptions

If there are enough assets in the marital estate, often parties will try to liquidate assets that they feel are “safe” in order to provide capital to pay support or to equalize the asset distribution. The concerning fact here is that these actions are usually taken without consulting an appropriate professional first such as a certified divorce financial analyst.

What’s wrong with taking action and then having a professional review it later? Several things. Not the least is the fact every action has a reaction and in the case of financial assets that reaction shows up in the form of tax liabilities, capital gains, treatment as ordinary income etc. The benefit from working with a divorce financial analyst is that a verified strategy for exactly what will be needed for distribution can be established and then the appropriate assets can be identified that have the least impact for tax or other liabilities. This process eliminates the remorse from dissolving the wrong assets at the wrong time with unexpected financial effects which then results in the original objective not being met because the net amount for distribution is insufficient.

Embracing Reality

It can be difficult to shift the thought process from one family unit to a divided family unit. However, the success of the latter is connected with developing a plan that will stay on point but yet evolve with the changes and priorities of daily living. You don’t have to have all of the answers right now, there just needs to be a commitment to think about how you want the future to begin to look like and set a course for avoiding unnecessary pitfalls.

Karen Sparks

Karen Sparks

Karen D. Sparks, CDFA®, J.D. is the principal and owner of Divorce Financial Strategists™. She provides clients with focused divorce analysis and strategies for marital assets.


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