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The Financial Divorce

The Financial Divorce

Generally speaking, there are three interrelated aspects of divorce: the emotional divorce, the financial divorce, and the legal divorce. While each phase of the divorce process has its distinct characteristics, for many people it is usually the financial aspect of divorce that provokes the greatest anxiety. Transitioning from one household of composed of two adults to two households composed of one adult in each household can be a major undertaking that may require a new evaluation of income and expenses, along with an overview of assets and liabilities. This anxiety is typically enhanced when children are involved in the re-organization of the family. It is not unusual for people to panic when facing this situation.

While panic may be an understandable reaction to the prospect of divorce, cool and calm collection of information while facing a new financial situation is an effective way to reduce anxiety and prepare for a new living situation. To the extent possible, it is a good idea to become a bookkeeper and become well informed about recurring monthly expenses. Many people simply do not know with great precision where they spend their money or how to budget effectively. To become more aware of spending habits, it is very useful to do something as simple as keeping receipts in an envelope each month for each and every item that is purchased (including coffees at Starbucks!). In this way, an accurate picture can emerge. Similarly, it is important to know sources of income which can typically be determined by reviewing pay stubs, tax returns, or attachments to a tax returns such as a W-2 form or 1099 form.

The financial picture is not complete by focusing only on income and expenses. Assets and liabilities, along with access to credit, need to be considered, too. While it is true that some of us keep cash under our mattresses, most people have assets in the form of bank accounts, retirement accounts, significant tangible personal property such as vehicles, and in our homes. Many people have liabilities in the form of credit card debt, mortgages, or other forms of loans – secured or unsecured. Most assets and liabilities can be documented in the form of monthly statements or appraisals or other forms of valuation. Getting a handle on what each spouse owns and owes and how these assets and liabilities are actually titled will help in formulating an appropriate plan to deal with an upcoming divorce.

While collecting financial information is an imperative first step in addressing the financial aspects of divorce, it is important to keep in mind several basic family law principles. While each of these principles may be modified to fit the circumstances in a particular case, Maryland law requires parents to provide financial support for their children in proportion to their incomes until the children become adults. Maryland law also allows the court to order one spouse to pay alimony to the other spouse by weighing certain factors, most importantly the needs of the recipient spouse balanced against the ability of donor spouse to provide for the recipient spouse and at the same time meet the needs of the donor spouse. Maryland law enables the court to allocate marital property – generally the property that has accrued since the date of the marriage which may include a home, bank accounts, furniture and household possessions, and retirement assets – between spouses according to a set of factors listed in the family law Article.

While each family law matter depends on the financial facts in each family, careful analysis with a legal and perhaps a financial professional can go a long way to ease the transition from being married to being single. While this exercise is certainly not anyone’s definition of a good time, addressing the financial aspects of divorce squarely will ultimately be beneficial in dealing with this major life change.