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Financial Tips at Divorce

The period of time before and after a divorce is stressful for many people. You are expected to make rational and far-reaching decisions at a time of emotional turmoil. This may also be your first experience with the court system and hiring an attorney. Expenses often increase when a spouse moves out and sets up a separate household. It is important, however, to keep a clear head. Don't let emotions (e.g., revenge) result in missed payments, lapsed insurance, or other negative consequences.

Below are some suggestions to cope with financial issues related to divorce:

• Do not sign a property settlement agreement, or any other divorce-related document, that you do not understand or one that you feel contains unfair terms. Consult your own attorney--not your spouse's attorney--before signing anything.
• Estimate the dollar value of your household property. Fair market value is the price at which a willing buyer will buy an item and a willing seller will sell it. Replacement value, on the other hand, is the cost of replacing an item (e.g., refrigerator) at current prices. As you and your spouse discuss how you'll divide property, whichever one of you plans to keep the property may think in terms of fair market value, while the other (who will be replacing a piece of property) may think in terms of replacement value.
• In addition to dividing your property, determine who will pay which part of debts incurred during your marriage. List all of your and your spouse's debts including your home mortgage, car payments, and credit card accounts. Usually, one spouse or the other will assume an obligation and agree to "hold harmless" the other party. However, it is important to note that, if either party doesn't pay a jointly held debt, creditors may collect from either spouse. Creditors are not bound by any agreement between spouses.
• A divorced person is eligible for Social Security benefits based on former spouse's earnings, even if the former spouse is not yet retired. In order to qualify for benefits, the marriage must have lasted at least ten years, both you and your ex-spouse must be at least 62 years old, and the divorce must have taken place at least two years ago. If you remarry, you lose the right to benefits based on a former spouse's earnings unless the subsequent marriage(s) also end in divorce. If more than one marriage lasts ten years or longer, you can elect benefits based on the higher ex-spouse's earnings.
• Divorced persons may be entitled to continued group health insurance for up to 36 months under the federal COBRA law if they lose their status as a dependent spouse. The cost of coverage cannot exceed 102% of the premium (group rate) paid by your ex-spouse's employer. There is a time limit of 60 days after a divorce is granted to apply.
• Child support is neither deductible by the spouse who pays it nor is it included in the income of the recipient. Alimony, on the other hand, is taxable to the recipient and deductible as an adjustment to the payor's gross income. Alimony generally ceases upon remarriage while child support continues until children are grown.
• Recognize that 50/50 splits of assets are not necessarily equal. Some marital assets, such as stock, carry a future capital gains tax liability while others, such as a car, do not.