7 Steps You Can Take Now to Prevent Financial Problems after Divorce
As a certified divorce financial planner and certified financial planner in California for eight years, I've helped thousands of people avoid struggling financially after divorce. I know that right now, so much is happening in your life that you may not have given much thought to getting your divorce financial picture under control. Plain and simple: Your financial situation is likely to change dramatically both during and after divorce.
There are joint accounts to be closed. Property to be separated or sold. Retirement accounts to divide. And so much more. I'm a huge fan of Hello Divorce's Divorce Navigator because it makes the financial disclosure piece of the divorce process far more understandable and manageable than if you were to work through the paperwork on your own. (And it's far cheaper than hiring a financial expert to complete the paperwork for you.)
However, there are steps in the financial disclosure process that could harm your long-term financial picture if you don't complete them correctly. And, there are several things you can do between separation and divorce to set yourself up for financial stability.
1. Plan to pay off joint debt with joint assets
Most joint debt – not all, but most – is considered community property in a California divorce. The financial goal is for you (and your ex) to complete your divorce with no remaining joint debt at all, having paid it all off with joint assets.
2. Get copies of your tax returns from the last three to five years
If you don't have copies of your tax returns and your ex isn't helpful as you try to obtain them, you can go directly to the IRS. Call the San Francisco office at (415) 553-8990, or complete IRS form 4506. Tax returns are a treasure trove of information for calculating figures in divorce.
For most of what the Divorce Navigator requires, you'll be fine with just last year's tax returns. That said, I recommend having the last three to five years of returns on hand. This will show the evolution of your marital finances, which can be especially helpful when it comes to spousal and child support.
3. Get a copy of your credit report
Debt is reported to different agencies depending on the type. It's vital to know what accounts are out there in your name: student loans; mortgage debt; liens filed against you or your properties, including joint properties. Your credit report gives you a full picture of your financial situation as you work through your financial disclosures. You can request a copy of your credit report through AnnualCreditReport.com once a year, for free, from all three credit reporting agencies.
4. Establish a bank account
Once you and your ex decide to separate, open your own bank account. Route your paychecks, any temporary spousal support, and other funds to this account. Establishing your own account as soon as possible will help you start discerning separate property from community property. Further, you can easily see where your cash flow goes.
5. Establish your own credit
Credit is currency. To buy a car or a residence, you need good credit. If you're not in control of the current financial situation – i.e., you used but didn't open any of the marital accounts – you're an authorized signer. This means you have some credit history on your credit report, but as soon as you're removed from the account, that will stop.
It's time to establish credit in your own name, even if it's a small line of credit or a prepaid credit card. The idea is not to get a lot of credit or get yourself into debt. The idea is to establish a pattern of using credit well. In other words, you are using credit and immediately paying it off. Over time, this shows creditors you're a safe bet.
6. When you complete California form FL-150, be careful about the details
I like to use the phrase "garbage in, garbage out" when it comes to financial disclosures. If you don't have a complete picture of what your finances look like before you fill out these forms, you won't be able to seek a fair distribution once the divorce is finalized.
Therefore, it's vital to think about all aspects of your financial picture before completing these forms. This might require a meeting with a financial planner, especially if you're in a divorce that could get messy or if you plan to ask for long-term spousal support. However, that small expense would be money well-spent in the long term.
A few areas to consider include the following:
If you're coming off your spouse's health insurance, what will COBRA cost? What will your share of your own employer's plan cost? What would a Marketplace plan cost?
If you want to stay in the marital home, you could forego other assets. Debt division doesn't have to be completely equitable in terms of financial distributions. Gather data, such as the fair market value of the home. Think about whether you'd want to forego other assets in favor of keeping the home.
When it comes to small business ownership, there is a community property interest in that asset. This is true even if your ex is not involved in day-to-day business activity. Look closely at the true value of a small business, preferably with the help of a forensic accountant.
Restricted stock units (RSUs) are shares in a company given during your or your ex's tenure that are usually restricted by a vesting schedule. The stock is given to you, but it isn't yours until it vests. Anything on your or your ex's pay stub is fair game in terms of community property. Even if those RSUs have vested and you haven't pulled a dime from them, the court will use them to calculate child/spousal support. If you're concerned about this, seek help from a lawyer or financial planner about how to best divide or calculate the value of RSUs.
7. Remember: Just because you've disclosed something doesn't mean it's community property
Everything needs to be on the table. However, that doesn't necessarily mean it's all going to your spouse. For example, if one of you used inheritance money to make a down payment on a joint home, put that on the table when completing financial disclosures. Document the fact that you used your own funds toward community property. Why? Because you'll want that contribution accounted for when it comes to final asset distribution or to get that money back.
Even if it feels uncomfortable, it's a good idea to place everything you can think of on the table. This helps you leave your marriage with your full contribution accounted for. The financial disclosure part of divorce may be the most mentally and emotionally draining paperwork you'll complete. But it's also the most important paperwork, so give it the consideration it's due.