When preparing for a divorce, you need to get yourself ready to deal with not only the emotional and mental issues you will face, but the financial issues as well. It can be difficult to look years down the road to see how the decisions you make today will affect your financial future, so it helps to understand the four most common financial issues of divorce:
1. Property division.
Before you even start a divorce action, be sure both of you know the exact state of your finances. This will help you make rational decisions as you negotiate your divorce. New Jersey is an equitable distribution state, requiring that all marital property be divided fairly — which does not necessarily mean divided equally. If possible, it’s best if you and your spouse can come to an agreement on how your property will be divided. If there are some sticking points, consider mediation, where a neutral third party serves as a guide to help you get to an agreement. You may need to give something up to get what you really need, but compromise is a part of divorce and usually preferable to battling things out in court.
2. Debt division.
There are two kinds of debt: marital and non-marital. Marital debt is any debt you incurred together during your marriage — mortgage loans, car loans, credit cards, etc. Non-marital debt is debt that was incurred prior to the marriage or after you and your spouse separated or divorced, and belongs to whoever incurred it.
The Court has some discretion to determine the assignment of debt in a divorce. Typically, both spouses will be liable for the debt that either one of them incurs while they are married. However, a judge may consider who benefitted most from the debt and could conceivably assign the entire debt to that spouse.
Sometimes there is also hidden debt that is discovered during a divorce. Even if the debt is just in one spouse’s name, the other spouse may be held responsible for half the debt. Get a current credit report and scour it for hidden debt. Close joint credit card accounts and open single accounts so your ex’s credit history will not affect your credit score.
3. Tax issues.
One of the most potentially harmful mistakes divorcing couples make in dividing marital assets is not considering the tax implications of each asset. Cash in a traditional IRA cannot be valued the same as cash in a savings account since IRA withdrawals are taxed and early withdrawal penalties can apply. Each asset that qualifies as marital property should be analyzed for potential tax consequences prior to negotiating a divorce settlement so accurate comparisons can be made.
4. Retirement plans.
Retirement accounts are typically one of the major assets married couples have. These accounts are considered marital property if they were acquired during the marriage or if a spouse was added to an existing plan after the marriage. Splitting a qualified retirement plan like a pension or 401(k) plan requires the preparation of a QDRO (qualified domestic relations order). This order allows for the division of qualified plan assets in a tax-deferred manner for the receiving spouse, and provides that spouse with 60 days in which to roll it over into an IRA without penalty.
Couples who divorce as they are nearing retirement need to consider the long-term worth of each asset; trading away retirement assets in order to keep the house may be a sentimental choice but could end up being a foolish financial decision.
You can rely on Murphy & Cistaro to skillfully negotiate and mediate your issues to a satisfactory resolution. Should the need arise, you can also count on our experience for being aggressive litigators if the situation calls for a more assertive response. Contact us today for your free consultation.