Going through a divorce can be emotionally and financially draining. This article is meant to give you a little information on the financial elements that you should consider.
I always stressed to my clients that they need to make good business decisions when it comes to the finances. It can be difficult to put aside your grief, anger, hurt, etc., but it is vital to your financial well-being. If it serves you better to let your spouse stay in the house, don’t object to that just because you would like to see them have to move. Be realistic. Can you really afford to stay in the house yourself? Will you qualify to refinance it? Can you afford the upkeep? Be realistic. Be honest with yourself.
Often in a marriage there is one spouse that keeps track of the finances. Sometimes the other spouse is also involved in the process and sometimes the other spouse has no idea of what the finances are. I have had many clients, men and women, that have no idea of what assets are owned or what debts are owed. No matter the level of your involvement during the marriage, it is critical that you get informed now. It will require a lot of time and effort, but it is imperative. The important thing is that you get to a point that you understand your own finances and can take control of your own financial future. If you hire a lawyer to represent you, that lawyer will have some expertise in the financial issues but they may request that you also consult with a financial expert.
The first thing you need to do is gather the information you will need. This can be pretty easy if you don’t own many assets and don’t owe many debts. However, sometimes this part of the process is very complicated.
In Colorado, early on in the divorce process you will need to provide certain financial information to your attorney. In my experience as a divorce attorney since 2002, most people find this process difficult and time consuming. That can lead to procrastination in providing this information to your attorney. This is one step in your divorce where you have a lot of control over your attorney’s fees. I always give my clients a list of documents that they need to provide me with and a couple of questionnaires about their income and expenses. Some clients are able to get this information to me quickly. Sometimes I get a few documents, then start working on the case and find out that they didn’t send me everything, contact the client, get a few more documents but not everything and this goes on for some time. Attorney’s fees mount when this happens.
Hint: When giving documents to your attorney the best way to do this if you have access to a scanner, is to scan your documents into PDF format and email then to your attorney. Many documents such as bank statements, IRA statements, credit card statements, can be downloaded online into PDF format onto your home computer and then you just forward them to your attorney. Sometimes I have people bring me their tax returns just as they got them from a tax preparation service. What I have to do is to take out all of the staples, sort through the packet for the actual tax returns, scan them in and the reassemble the packet. Imagine how much money you would save if you just did that yourself? Sometimes clients send me a 20 page document, scanned (or photographed with their cell phone) 1 page at a time. Photographs just don’t work at all and even if the scans are usable, I have to download and print off 20 pages, then put them together and rescan it into PDF format. I have had clients drop off stacks of documents in no particular order so I have to spend time sorting them and figuring out what they are. Sometimes there are pages missing. You are paying a lot of money for the lawyer or the paralegal to do something that you can do yourself. Just ask for help if you are not sure how to do this. I do not like using up client’s retainer to do things that the client could do for themselves. That money should be used for legal services that the client needs someone to do for them. If you can’t scan in documents, your attorney can tell you the second best way to get the information to them.
The best thing that you can do it to gather up 100% of the items that have been requested and if some document does not exist or you don’t know how to get it, let your attorney know so that they can help you.
One of the most important documents that you will need is a copy of your tax returns for the past three years as well as a copy of the W2’s for both you and your spouse and any 1099’s if one of you is paid as an independent contractor. If you don’t have a copy of your tax returns you can fill out IRS Tax Form 4506. There is a $50 fee for each year you request and it can take weeks to get, so order your tax returns early if you don’t have a copy of them.
The tax return has a lot of valuable information in it. Not only can you find out what the incomes are, you can spot interest from dividends you didn’t know about, gambling losses that you may not have known about, profits and losses from the sale of stock and other information that you may never have known about.
The key here is to educate yourself (or hire people that can do that for you) so that you can make good financial choices when negotiating who is going to get what.
Not all assets are the same.
For instance, $5000 in a savings account is not the same as $5,000 in a 401(k). You can use the $5,000 from the savings account if you need it, but if you want to use the 401(k) money, you will have to pay taxes and maybe even an early withdrawal penalty and lose part of your money.
Once you have gathered up the information requested by your attorney, the attorney will draft a Sworn Financial Statement which is a document that shows your income, your expenses, your assets and your debt. Often clients are surprised when they see their finances laid out so clearly.
Your spouse will also be required to submit a Sworn Financial Statement. You will each be required to exchange copies of your documents as well.
This “disclosure” is mandatory (even if you agree to everything already) and it is important. Until you know and understand what you have, you cannot make a good decision on how to divide things up.
In some circumstances your attorney may suggest that you talk with a specialist that does financial planning in divorce situations. It may look simple to you; one of you takes the house, the other takes the IRA, but there are long range consequences for your choices. Some of these consequences won’t even happen for years (like capital gains on a home). You have to take those things into consideration to make good financial decisions. A financial planner is usually very reasonably priced and once your financial information is all organized by your attorney, the financial planner can easily show you different ways to split assets and debts, considering complicated subjects like the income tax ramifications and capital gains.
One thing that you might want to do is to obtain a copy of your credit report. You can get one for free at www.annualcreditreport.com. There are three companies: Transunion, Equifax and Experian. If you find information that is inaccurate you can work on getting it corrected. You may also find out about things like credit cards that you didn’t even know you had (perhaps your spouse opened one using your name). Knowing that your credit history is accurate is important. You can order your report from one agency, wait 4 months and order from another and then 4 months later order from the third. This way you can keep track of your credit for free all year long.
The most important thing here is knowledge. Get up to speed and understand your finances. Hire professionals as needed and make good business decisions.