Thursday, May 16, 2002
Ironing out financial issues when dealing with divorce
A story released today by ABC News reports that while not an outcome most of us want to consider when getting married, divorce is a common occurrence today. There are 1.4 million divorces in the United States each year. Nearly 50 percent of first marriages end in divorce, while 60 percent of second marriages do. And with such an emotionally charged event, you'll want to make the financial and legal processes as easy and as quick as possible
The best way to ensure a relatively smooth divorce is for both parties to be as open as possible about their financial affairs. By coming to agreements about property and debt, you can avoid long, drawn-out battles that can add months, maybe years, to the divorce process.
There are three major concerns as you begin to try to divide your property in a divorce:
1. What's mine, yours, and ours?
2. How much is our property worth?
3. How are we going to divide the property?
To determine what your assets are, you and your spouse should put together an overall inventory of your property. The next step is to determine who owns what. An important categorization when determining ownership is separate vs. marital property.
After you've determined what you each own separately, you will need to determine a value for your marital property. Sometimes you may choose to keep several pieces together in order to retain the value of an entire set, such as a furniture collection or china.
Other items may have an emotional value attached to them that goes beyond their monetary worth. You and your spouse should indicate a value next to each piece of property on your inventory list. For some items, you may want to refer to outside sources in order to determine their value.
The next step is probably the most difficult: determining who gets what. Different states have different laws regarding property distribution. It may be helpful to find out about your state's law and use that information as a guide when dividing your marital assets.
The two main methods states use are: community property and equitable distribution. Community property is where each spouse's separate property is identified and not distributed by a court and all remaining property is equally distributed. In equitable distribution, a couple's property is distributed equitably, which means not equally, but fairly. The spouse with less savings and earning potential, for example, could be granted more than a 50 percent share.
In a divorce, debt should be treated like property. If you do not pay off all your debts before the divorce process begins, then you will have to determine who is responsible for each debt, similar to how your property was distributed.
Individual debt is considered separate property, joint debt is considered marital property, debts involving an asset such as a car loan or a mortgage are considered the responsibility of the owner of that asset, and debts concerning children are split equally between the spouses.
It is important to confirm what is actually individual vs. joint debt. Just because your name does not appear on a credit card, for example, does not mean you are not responsible for the account. The best strategy may be to order a credit report to determine who "owns" which debts.
With so many emotions involved when dissolving a marriage, you'll probably want to make the financial processes involved with your divorce move forward as relatively smoothly as possible.