Divorce has major financial implications – and they come precisely at a time of great emotional stress. A sound financial strategy is needed to help minimize any potential financial burdens, so you can focus on what’s truly important – healing and moving forward.

Legal Representation

If you are getting a divorce, there’s no legal mandate that you hire an attorney – you may not need one if you are young, have no children, or have few assets.

However, couples that have joint financial interests – especially those with children – generally hire attorneys to represent them. Fees can be quite high, but it is a necessary expense to help ensure you protect yourself financially as well as personally.

If you are a homemaker, or earn less income than your spouse, you can still get legal representation. Submit a motion to the court, asking a judge to order your spouse to be responsible for your attorney’s fees.

You can save time and money by filing an uncontested divorce if you and your spouse agree on most issues. If you can’t agree, mediation may help resolve your differences. A divorce mediator is a neutral third party – so if talks break down, the mediator cannot be called as a witness for or against either party in a future divorce hearing.

Divorce And Joint Debt

Marriage can involve financing your dreams for the future, but if the union doesn’t last, the cost can be more than emotional.

With joint debt, each spouse is liable for the full amount until the balance is paid off. If you and your spouse took on joint debt, it remains joint debt to be managed between you. However, if a spouse came into the marriage with a personal debt – such as a student loan – that spouse alone is liable.

As a couple, you should get a copy of your credit report and make a list of your debts. If there are disputes on any of the charges, resolve them as soon as possible. With the advice and guidance of your lawyer, you will likely need to close any joint accounts and open individual ones. Also, get in touch with federal and state tax departments to find out if any taxes are owed – you could be liable.

Divorce And Health Insurance

Some divorce decrees specify that a spouse who provided health coverage for the other spouse or family during the marriage must continue to provide it after the divorce. This is particularly true if the other spouse was a homemaker with no other immediate access to health insurance. The providing spouse may have to pay additional premiums to continue this coverage. Some group policies may routinely allow continued coverage for the family even after divorce.

If health insurance is not part of the divorce settlement – and the ex-spouse is the insured on the family’s individual health insurance policy – that coverage could be terminated. The other spouse should contact an insurance agent to determine if there is any coverage left, and simultaneously look into a new health insurance plan.

Divorce And Life Insurance

As with health insurance, many life insurance issues revolve around whether you are granted custody of the children. For instance, it is often incumbent upon the custodial parent to make sure the life of the noncustodial parent is insured; what would the custodial parent do if the noncustodial parent died and those child support payments ceased? The same principle applies to alimony.

If you are the custodial parent and are receiving child-support payments and/or alimony, you can purchase a life insurance policy on your ex-spouse. If, for some reason, you cannot obtain new insurance, have his or her existing policies transferred to you as the new, outright policyowner or irrevocable beneficiary. You can include this provision in the divorce agreement.

If you can’t afford the insurance premiums, petition the court to have child-support and alimony payments increased to cover the cost. The court may even decide your ex-spouse should pay the premiums. If so, monitor the policy routinely to make sure the payments are being made.

Child Support

When a couple with children divorces or separates, the court usually orders the noncustodial parent to pay child support to the custodial parent. Child-rearing expenses that exceed child-support payments are generally the responsibility of the custodial parent.

Whether you are receiving child support or paying it, be aware of the federal income tax implications – child support payments are neither taxed, nor can they be deducted.

The divorce decree or separation agreement classifies payments as child support by:

• Designating an amount that is payable for the support of a child. It can be either a dollar amount or a specific fraction of a payment, or
• Providing that the amount payable will be reduced when a contingency relating to a child actually happens, or at a time that can clearly be associated with such a contingency.

Along with receiving child-support payments, the custodial parent also gets the greater tax advantage. That parent can claim the child dependency exemption and the child-care credit. Furthermore, the custodial parent could potentially file as head of household.

Alimony

Sometimes referred to as “maintenance,” alimony attempts to preserve the former spouse’s pre-divorce lifestyle as much as possible. Alimony is taxable income to the spouse who receives it, and tax deductible for the spouse who pays it.

In order to be defined as “ alimony ” under current tax regulations, the payments – defined under a divorce decree or separation instrument – must meet several conditions:

• All payments must be made in cash, or by check or money order
• A written court order or separation agreement pertaining to the alimony must exist
• The order or agreement must not designate the payment as not being alimony (i.e., it must not be designated as child support)
• The ex-spouses generally cannot reside in the same household while alimony is being paid. An exception applies if the payments are made under a written separation agreement, support decree, or other court order.
• The alimony obligation ends with the death of the paying spouse
• The ex-spouses cannot file a joint tax return

Also, be aware that there are rules for “alimony recapture.” Because alimony is tax-deductible, some spouses try to disguise property settlement payments as alimony. Under alimony recapture rules, deductible alimony payments may then be recharacterizied as nondeductible property settlement payments. Be sure to consult a tax professional for more information on this complex issue.