No one ever plans for their own divorce. There is rarely any advance financial planning that people do for divorce. Often times, even when people are contemplating divorce, the last thing they are thinking about is how to financially prepare for divorce. But divorce does occur. In fact, it occurs in half of all marriages and even more with common law spouses. So if divorce and separation are so common, why is it that so few people are financially prepared for it?
It is because divorce is a trauma that most people ignore, avoid or run away from. Strangely, people will prepare for other calamities such as death, illness or bankruptcy, but yet will not prepare for divorce.
So for those people that are in fact contemplating divorce, being astute financially prepares them for this event.
Here are 5 tips to manage your finances during divorce.
TIP 1: Consider the best time to divorce. The worst time to divorce is when your spouse’s income is the lowest, your spouse’s assets are the lowest and your spouse’s debts are the greatest. Likewise, the worst time to divorce is when your income is the highest, your assets are the highest and your debts are the lowest. The converse also applies. It is critical that you understand how the laws of spousal support, child support and property division operate to best understand how your income, assets and debts will affect your divorce settlement
TIP 2: Divorce settlements are built on evidence and not on conjecture. So collect the evidence. Collect as much financial information as possible including tax returns, notices of assessment, bank statements, investment statements, credit card statements, RSP statements and RESP statements. One of the hottest topics of debate in divorce is the effect of cash income on support. Many people run businesses that result in cash income. This affects both support payments and property division. The person that is earning the cash may deny that income or cash savings to avoid or lower the support obligation. It is for that reason that evidence of cash income will become critical. So collect the evidence.
TIP 3: Make a budget. Consider your previous lifestyle and spending pattern. Collect evidence of your income and your spouse’s income. Collect evidence of all of the financial resources you have including savings and investments. Create a realistic budget for yourself after divorce. Identify expenses that can be eliminated or reduced. Do not live beyond your means using loans or credit cards to finance your spending.
TIP 4: Work with a financial advisor to ascertain how much income and assets you need to survive and maintain the same standard of living. If expenses need to be reduced, sort out which ones can be deferred or eliminated. Consider the tax implications of divorce such as the sale of assets or withdrawal from RRSP’s. Consider what means are available to you to increase your employment income or passive income such as through rental of part of your home, investing better or liquidating assets that are not producing results.
TIP 5: Get legal advice from a family law expert on what your financial position will be after a divorce settlement. Your lawyer will be able to extrapolate figures of child support, spousal support and property division. Get advice on what the duration will be for support. Understand the taxation of the differing payments such as lump-sum spousal support versus monthly spousal support. Ask all the necessary questions regarding the final settlement. Invite your financial advisor and family to these meetings to ensure that all questions are asked and answered.
Although no one prepares for the financial outcome of divorce, before divorce is contemplated, there are some very smart steps you can take, and smart people you can consult, to avoid financial stress. Your financial landscape will change following divorce. But these tips will help guide you in planning and managing your finances successfully through this period.Share this article on: