When the decision is made to end a marriage and get Austin divorce attorneys to help with the process, most couples are surprised to find just how much financial preparation is involved in the divorce process. Quite often the decision is made suddenly and the individuals involved don’t have the time or know how to pull all their financial data together.
While the process can seem a little daunting, once you know what’s required and can tackle it piece by piece, the job becomes more manageable.
So, are you thinking of a divorce? If so, here is a list of five ways you can prepare your finances for your divorce:
1. Make a list of all your assets and liabilities and their values.
Compiling this list can be very onerous, as you may be required to record the values of your assets and liabilities at three points in time: (1) your date of marriage (2) the date you separated from your spouse and (3) the day you sign your financial statements (today’s value). Knowing the value of your assets and liabilities at your date of marriage will allow your divorce accountant to calculate their increase in value, which you will eventually divide with your spouse. Providing the value of your assets and liabilities on the day you sign your financial statements pertains to the issue of spousal support.
The value of most of your assets and liabilities can, for the most part, be determined quite easily, namely through statements, invoices, and the like. However, others will require a third-party valuation to be obtained — for instance, any property you own or co-own with your spouse, retirement assets, etc.
Don’t forget to make copies of all your source documents supporting the values of your assets and liabilities. You may be required to include these in your financial disclosure brief. Again, we know this sounds incredibly daunting, but if you break the task down into manageable pieces you will get these documents in order. Deep breaths.
2. Make a list of all your income sources and monthly expenses and their values at the date of separation.
In addition to employment wages, people can receive income from other sources, such as investment income, rental income, etc. All sources of income should be included in your financial statements and supported by source documents.
Where things get tricky for most people is providing a complete and accurate list of their expenses. Regular expenses can be easily established (the amount you pay each month for your cell phone, for instance), however it’s the ad hoc expenses that are often forgotten, such as car maintenance expenses, birthday gifts for your kids’ friends, etc.
The second issue that often comes up with expenses is accurately quantifying them. You might think that you spend $500/month on groceries for your family, but when you begin to track your grocery bills you find that it’s closer to $700/month. Differences like these may not appear to be material at first glance, but when you combine them and aggregate them over the year they can become very material.
How you present your expenses is also important. Expenses should be recorded in the financial statements of the spouse who pays for them and should not be double counted.
3. Make copies of your last three income tax returns.
Both you and your ex-spouse will be asked to provide your last three years’ income tax returns. These are used to estimate an income value for each spouse for the purposes of calculating child support and spousal support payments. Three years of tax returns is requested in case any one of those years are not reflective of your normal income. For example, if you went on parental leave following the birth of your child, your income might have been lower that year compared to previous or subsequent years. Conversely, if one spouse got a bonus one year, it may skew the income picture in the other direction. Having three (or more) years of tax returns will help your divorce accountant assess a reasonable annual income amount. If you file taxes online, the program you use to file should be able to provide a download of your tax return and any forms in a PDF format that you can print and/or save to your computer.
Assuming that copies of your ex-spouse’s income tax returns are readily available, it’s advisable to take copies of these for your records as well. In more contentious cases, it is not uncommon to have one spouse withhold their income tax returns if they are trying to hide something.
4. Understand the cost of divorce under each of the options available to you.
Mediation: Involves divorcing spouses trying to negotiate a fair divorce agreement with the help of a neutral third party — the mediator. This alternative is, in most cases, the least expensive. Depending on the complexity of your case, the couple’s willingness to cooperate and the mediator’s experience, this process can be completed in 6-12 months, at a cost that is a fraction of what litigation will run you. Average cost of mediation: about $6,000 to 10,000.
Mediators will recommend that each spouse obtain independent legal counsel toward the end of the process to review the separation agreement and to ensure that it fairly represents each party involved. Although this is not a legal requirement, it is strongly recommended and a right that should not be waived. That means you’ll need to factor the cost of retaining a family law attorney into the costs of mediation. A skilled lawyer should be able to provide this service for under $5,000. The exact amount will depend on the hourly wage of the lawyer you hire (ranging between $250 to $800/hr) as well as how involved you need your lawyer to be. If you’re looking for a lawyer but want to make sure you’re hiring someone reputable, Check out these useful solicitor reviews.
Litigation: This process occurs when two parties want to get a divorce but cannot agree on the terms of the divorce. It involves each party hiring a divorce lawyer and over a number of months (or years) preparing a case to be heard in family court. The majority of these cases end up being settled out of court, but by then the financial damage is often done. The cost of divorces done by litigation can cost between $30,000 to $150,000 (or greater).
Collaborative Law: This process allows divorcing couples to work with their lawyers in order to arrive at a fair settlement and avoid the uncertain outcomes of court. Unlike in mediation, the couple signs a binding agreement, disallowing them from using their collaborative lawyers if they decide to abandon mediation and proceed with litigation. This acts as an incentive for couples to really try to make mediation work.
The cost of this process is likely somewhere between the cost of mediation and litigation, as the couple is able to realize cost efficiencies by using assigned specialist professionals.
5. Inform your bank immediately about your separation to put safeguards on any of your accounts that you jointly own with your spouse.
There is almost always a time gap between when a couple decides to separate and when a separation agreement is finalized. Until financial separation occurs, funds in the couple’s joint accounts are subject to misappropriation by either party. For example, your ex-spouse could make a significant withdrawal from your joint account leaving you with no funds to live on. Although this may sound unfathomable to you today, to protect your shared assets, it is recommended that you inform your bank immediately about your separation in order to implement appropriate safeguards.
In the best of circumstances, where you have a couple who is amicable and willing to cooperate, illustrating an accurate financial picture can be difficult. However, in cases where the couple does not see eye-to-eye, or where one or both spouses have not been kept informed about the family’s finances, this task can become very challenging. This is where a divorce accountant can help. By guiding you on what information you need to collect and where that information can be obtained, they can in the long run make this process more efficient and less costly than doing it yourself or with the assistance of your legal professional.
We wrote an e-book called 11 Ways to Keep Your Family Weeknights From Spinning Out of Control. To get it for FREE, simply subscribe to our newsletter recapping the best of thenewfamily.com and the podcast!