When going through divorce, from a solely financial perspective, there are three main topics to discuss:
- Division of assets and debts,
- Support (spousal and child), and
- Post-divorce planning.
All three of these areas are intertwined. Let’s tackle them one by one.
Assets and Debts – How Are They Divided?
There are several types of assets and debts. Examples of assets include the house, retirement accounts, brokerage accounts, checking/savings accounts, vehicles, furniture, and jewelry. Examples of debts include credit card debt, mortgages, car loans, student loans, etc.
After establishing a current list of assets and debts, the next step is to determine whether these assets and debts were acquired during the marriage.
If yes, then each person will take half of the assets/debts, period. There are strategic ways of avoiding tax consequences and extra fees when the assets are divided, but that is another blog post.
If no, then each asset/debt needs to be evaluated as to how much of the asset/debt is considered community property (funded by community funds during the marriage) and how much is considered separate property (funded by separate funds, i.e. funds from before marriage, inheritance, gifts, etc.)
Once a couple agrees to what is in the community property bucket, we can then move forward with dividing the assets/debt equally.
Support – How Is Support Established?
There are two types of support, child and spousal. Let’s start with child support. In California, child support is based on the guidelines set in the family law rules. Factors that are included in the calculation of child support are but are not limited to: the income of each parent, who carries health insurance, which parent will have more custody, and how many children are under 18. The guideline rule is usually strictly followed. Extra-curricular activities, camps, and tuition are seen as add-ons and can be accounted for, but generally, that is done through an agreement between the parties.
Spousal support is harder to nail down. The court will take into account 14 different factors to determine spousal support. These factors are a little less concrete. For example, the marital standard of living during a marriage may have changed over the years. Which period of time do you use? What if you recently hit some bumps in the road (i.e. Covid) and what if the marital standard of living (MSOL) is not what it used to be right now, but will be shortly? As you can see, spousal can be a little bit murky. However, it is VERY important to understand how much support one party will pay and receive to plan for life after divorce.
Post Divorce – What Does my New Reality Look Like?
The truth is, no matter how well or terrible you feel like you made out after the divorce, it is a hard adjustment, for at least the first year. From a financial perspective, you are now responsible for all your income and expenses – rent/mortgage, utilities, groceries, clothes, furniture, the dog, and everything in between. This is daunting for most people, even if they feel like they came out ahead in the divorce. Here are some tips to make this transition easier:
- Create a spreadsheet of all your assets and debts, including account numbers, creditors, and balances.
- Review your bills and budget under your new monthly pay.
- List out your monthly expenses and build in an amount as a cushion for the “unexpected.”
- Set new financial goals.
Understanding how these parts work together in your divorce will give you peace of mind moving forward to your next chapter. It will also clarify what issues/language need to be addressed in the Marital Settlement Agreement (MSA). The financial impact of divorce is HUGE – there is no sugar coating it. However, the person that suffers the most in the divorce is the person with less knowledge of what they truly need (not want or what they think they deserve) in their new life.
As a certified divorce financial analyst, I help individuals and couples wade through their financial information, assemble a clear picture of what community property will need to be divided, and show them the best way to divide the assets. We also discuss support and post-divorce planning. Having been through this process myself, I know how hard it can be to move forward and be scared of the future. All I can say is that I promise, you will be ok.