As a certified divorce financial planner and certified financial planner in California for eight years, I’ve helped thousands of people get their accounts in order to prevent struggling financially after divorce. I know that right now, there is so much going on in your life, you may not have given much thought to getting your divorce financial picture under control. But, plain and simple: your financial situation is likely going 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 the Hello Divorce Divorce Navigator because it makes the financial disclosure piece of the divorce process far more understandable and manageable than it would be if you were to work through the paperwork on your own. (And at $99/month, it’s far cheaper than hiring a financial expert to complete that paperwork for you.) But, there are steps in the financial disclosures process that can impact your long-term financial picture if you don’t know how to complete those steps 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 divorce in California. 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 a copy of your tax returns from the last 3-5 years.
If you do not have copies of your tax returns and if your ex is not being helpful as you try to obtain them, you can go directly to the IRS. You can 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 for your divorce.
For most of what the Divorce Navigator requires for completing your financial disclosures, you’ll be fine with just last year’s tax returns. But I recommend having the last 3-5 years of your returns on hand. This will show how the financial picture has evolved in your marriage – which can be helpful especially when it comes to spousal and child support requests.
3. Get a copy of your credit report.
Different types of debt report to different agencies. Knowing what accounts are out there in your name (that you may not even know about), from student loans to mortgage debt, liens filed against you or any of your properties – including joint properties – give you a full picture of your financial situation that you can start to work on 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.
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WATCH: Bringing Clarity to Financial Disclosures: Expert Tips from a Financial Planner
4. Establish your own bank account.
Once you and your ex have decided to separate, you should open your own bank account and route your paychecks, any temporary spousal support or other funds received to this account. Having your own account as soon as possible in the divorce process will help you start physically separating what is community property and what is your own separate property. And, this lets you see where your cash flow goes.
5. Establish your own credit.
Credit is currency: if you want to buy a car or buy a residence, you’ll need a credit history to do that. If you’re not in control of the current financial situation – i.e. you use but didn’t open any of the accounts – you’re an authorized signer. This means you will get credit history reporting into your credit report, but as soon as you get taken off the account, that will stop.
So, what you need to do is 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 to get yourself into a lot of debt. The idea is to establish a pattern of using credit well, so you are using the credit and then paying it off. Over time, that shows you’re a safe bet for creditors.
6. When you complete California form FL-150: be careful about the details you’re including.
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. It’s important to think about all aspects of your financial picture before completing these forms. That 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 – but that small expense will be funds well spent in the long term.
A few areas you’ll want to give thoughtful consideration to include:
- Health Insurance: 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 will it cost to look at the marketplace?
- Housing: 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 fair market value of the home, and think about whether you may want to forego other assets in favor of keeping this asset.
- Small Businesses: When it comes to small business ownership, there is a community property interest in that asset even if your ex is not involved in day-to-day activity. It’s worth looking closely at the true value of a small business, preferably with the help of a forensic accountant.
- RSUs: Restricted stock units 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 when it comes to considering 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, get help from a lawyer or financial planner about how to best divide or calculate the value of those RSUs.
7. Remember: Just because you’ve disclosed something doesn’t mean it’s community property.
Everything needs to be on the table, but that doesn’t necessarily mean that it’s all going to be assigned to your spouse. For example, if one of you used your own inheritance or other money to pay for a down payment on joint home, it’s a good idea to put that on the table when completing your financial disclosures. Be sure to document that you used your own funds toward community property, because you’ll want that contribution accounted for when it comes to final asset distribution, or in order to get that money back. Even if it feels uncomfortable, it’s a good idea to put everything on the table you can think of, to ensure you leave the marriage with your full contribution accounted for.
The financial disclosures part of your divorce might be the most mentally and emotionally draining of all of the paperwork you’ll complete. But it’s also the most important, so make sure you give it the consideration it’s due.