The Financial Aspect of Divorce

The divorce process involves the uncoupling of many aspects of life. Perhaps the most talked about is the financial aspect.   Creating and understanding your own financial snapshot can be an important step in making the divorce process a productive one.  A fair resolution will address how to divide assets and debts fairly and what the cash flow looks like moving forward.

The first financial decision in a divorce is the selection of the process that will be used.  The choices are mediation, collaborative law and litigation.  The choice of process will affect cost and the way in which the case progresses.  In each process, you should understand the cost involved and have confidence in the professionals working on the case.  An experienced mediator, lawyer and/or financial professional can help put structure into the gathering and understanding of financial information.  This choice also impacts whether you will make the decisions and set the pace or whether a third party will be making decisions on your behalf.  In mediation and collaborative law, the parties set the pace and make the decisions that affect the family.  In litigation, a third party such as a judge makes the decisions.

Compiling financial data is crucial to making good decisions.  There are various aspects of examining the family’s financial snapshot.  The first part is listing expenses – both individual and those incurred on behalf of the children.  This should reflect the present expenses. When creating the financial snapshot for purposes of a divorce, expenses may also be projected to determine the future cost of lifestyle. For example, if the couple is moving into separate residences, the rental/mortgage payment (or the estimate of the payment) can be included in the snapshot. The same should be done for any expenses that may arise from the divorce itself (such as health insurance). That being said, the process starts with understanding the current expenses of the family.

We next look at sources of income.  This will help to understand the money coming in and money going out before projecting what it will be like when the family separates into two households.  It is here where the projection of expenses and a critical analysis of income and expenses take place.

Part three involves an examination of all assets and debts.  We typically use a statement of net worth to ensure that we have all of the information necessary to make decisions. This involves reviewing relevant statements for assets and debts as well as tax returns.  If a trust is involved, the provisions of the trust must be reviewed to determine the impact of its provisions.  If a business is involved, we discuss whether a valuation is necessary.  This discussion includes how a valuation is conducted, the cost and other considerations such as the concept of double-dipping.  Double-dipping refers to whether a spouse may be awarded twice on income generated by the business – once in the award of equitable distribution and once in calculating income available for support.

Gathering the information before the negotiation begins helps to ensure that all assets and debts are considered in generating options for settlement.  Full disclosure also helps to build trust that the negotiation is being conducted fairly. Many times, one spouse is responsible for the bulk of the finances, or one part of the finances.  For example, in many families, one person is more aware of the assets and debts and one person is more aware of the monthly household bills.  In these cases, we can structure the information gathering to accommodate the situation and ensure that there is full financial disclosure.

Once the information has been gathered, you can begin to formulate a budget for after the divorce in consideration of your financial priorities. Use of a neutral financial professional in the collaborative law or mediation process can facilitate decision-making with regard to cash-flow and the impact of options for settlement. For more information on the role of a neutral financial professional within the collaborative environment, visit my webpage.

There are many issues to think about in working through the divorce process.  Choosing the right process and the right professional should help bring reason and structure into the equation.  That means creating a budget and resolving financial issues with a view towards a secure future for each member of the family.