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Common Financial Issues in a Divorce You Should Be Aware Of

Getting divorced is not uncommon even when things appear lovely on the outside. Some couples separate after less than five years of marriage – with or without children, and there are couples that separate after decades of marriage. Regardless of how long you have been married and how great things were at the beginning, the possibility of getting divorced is a reality in many situations.

Infidelity, abuse, lack of communication, etc. are some of the reasons people cite for wanting to divorce. Finance is another issue to contend with, and many families find it challenging to cope when operating two households with minimal income. If one spouse was not working, they are pressured to start contributing economically after the divorce decree is granted.

Mounting debts complicate things further as warring couples try to clear liabilities before the marriage ceases, but things don't always work out, and one spouse could inherit a huge debt. The San Diego Divorce Attorney appreciates the magnitude of financial matters in these proceedings, and we will discuss the following financial issues that couples face in divorce.

  1. Division of Assets

When people are ready to go their separate ways, they are keen to get a fair share of the marital assets – what they got during the marriage – and usually, there are disagreements. The breadwinner may argue they worked hard to earn every asset, such as buying the primary residence, family cars, investment property, bank savings, etc.

California is a communal property state, which means assets gathered inside marriage are subject to equitable distribution. Equitable distribution doesn't necessarily mean getting 50% of everything. Assets, in this case, include debts accrued in the marriage, and a family court judge has to factor this as well.

On the bright side, partners get to walk away with whatever assets they brought into the marriage. Things often get complicated when assets are concerned, and it is not uncommon to find partners hiding property, so they are not forced to share. When we represent you, we shall examine the assets declaration to ascertain everything is above board. If you suspect your spouse is not straightforward with all earnings, we shall enlist our private investigators to go through the documents and find whatever property is being hidden.

Make things easier by generating a list of everything you owe jointly, including assets gained during the marriage that is only in one spouse's name. We understand some clients have not been following the financial aspects too closely, and this can be a real issue during settlement negotiations. We advise you to start examining the state of finances by reading bank statements, credit card statements, and just about every financial document available.

When you hire our firm, we shall put you in touch with financial experts to help you study the financial health of your family. Expert advice comes in handy in situations where the filing or non-filing spouse is not adept at money matters. Financial literacy is not always forthcoming even for breadwinners, and the other spouse is acutely aware of these shortcomings and will use them to their advantage.

  1. Identifying How Much Debt You Owe

The law recognizes assets in three forms: income, expenses, and debt. The latter refers to the number of liabilities you have acquired during the marriage, and in many cases, mounting debt is a considerable contributor to divorce. One spouse may be feeding lousy spending habits, buying luxury items the family cannot afford, or they could be blowing away the funds by drinking.

Debt is a touchy subject even for the strongest marriages and even more so when things are coming to an end. Not all liability arises from poor decisions; you could have medical bills from treating a family member, or it could be car loans, the mortgage, and other reasonable debts. Depending on the circumstances of the divorce, nobody wants to absolve the debt created by another person, and that is why we want you to pay special attention to the debts you owe.

The state of California considers debt as community property, and you must, therefore, be ready to distribute it equitably – which is different from equally. Apart from outstanding loans and credit card debt, income tax obligations are part of the debts for you as a couple, and all these must be sorted.

Separate debt, on the other hand, refers to liabilities you incurred before the union and after the legal separation. The law requires you to handle such debts autonomously without expecting the other party to intervene; even if the person with the most debt has lesser or no income.

Things can get murky when it comes to separation, and this end, we advise clients to note the exact date of trial separation even if both spouses remain in the same home. This transparency helps to avoid any misunderstandings regarding separate obligations. We have seen warring partners act in bad faith by going on a shopping spree after the separation or divorce is announced, and this can lead to further damage. If your partner chooses to spend the family's income wantonly after the separation date, they are liable for this debt.

Couples have two options for solving the debt problem; dividing liabilities down in the middle, or liquidating assets then sharing the proceeds after settling with creditors. Set-off arrangements are another way of handling debt distribution. Couples may distribute common property by having the person absolving the most debt get property of equal value so they can pay off creditors relatively easy.

Clients must be discerning with this approach because one partner may fail to honor the terms of the agreement, leading to further issues. For instance, if you default on a loan for property under your name, your credit score will take a hit. Only go for a set-off arrangement when things are amicable, and when you are sure the other person will continue paying the installments without being nudged to do so.

Get a financial advisor to help you sort debts into the following categories, each with corresponding legal implications:

  • Secured debts - This category comprises of loans with collateral attached to them like the mortgage on the primary residence, chattel loans on family vehicles, boat, a recreational vehicle, etc.

  • Unsecured debts - These debts are not connected to assets like the family home, and they include credit card bills, medical fees, bank credit lines, etc.

As you can see from this breakdown, debt is not a small matter, and you need expert advice on understanding the full extent of your liabilities and how to settle them. Do not allow your spouse and their lawyer to bully you into accepting more debt than you can handle.

  1. Child Support and Spousal Support

After months or years of trying to work things out for the sake of children, you may grow weary and decide the best recourse is dissolving the marriage for everyone's interests. This bold move is noble, but things get complicated when growing children are in the picture, and you have to keep the household running.

Who pays the tuition for that fancy prep school? How about braces and other dental treatments? Who will pay for health insurance? There are so many expenses involved when raising kids, even when leading a relatively modest lifestyle. If your wife or husband was the breadwinner, you want them to continue supporting the kids through child support payments.

Child support orders are legally-binding, requiring the non-custodial parent to provide monthly financial support for the kids until they reach legal age – 18 years. The parents must also decide on how to pay for college tuition and related expenses for children above 18 until they graduate. In California, a family court judge applies a statewide formula to determine how much child support a non-custodial parent owes the custodial parent. This formula factors in the following crucial things:

  • The income of each parent
  • Additional income either parent could get
  • The number of children requiring support
  • Amount of time each parent spends with the kids
  • Health insurance and dental insurance
  • Daycare fees
  • Travel and vacation expenses, where applicable

The goal of child support orders is to ensure children's lives continue as typically as possible without denying them of necessities. However, not every partner honors this order, and the custodial parent may find themselves begging for money and scraping by with the children. Their former spouse could be mishandling funds, be laid off, or suffer a pay cut during an economic downturn.

Research surmises that poverty after divorce is prevalent, and children bear the brunt of it as the custodial parent – in many cases, the mother – struggles to raise them with limited funds. Even when they get paid, child support checks could be delayed or not be paid in full, and this deficit means making sacrifices here and there.

Financial abuse and ensuing power during divorce are prevalent as angry spouses use the money to punish their ex, so you must be prepared for this reality. In collecting the child support, you are entitled to be a hurdle; report the matter to your local Child Support Agency (LCSA). The LCSA will intervene to make these payments obligatory whether or not your ex resides in California.

Spousal support can suffer the same fate or worse as the partner with a higher income seeks to inflict pain on their separated spouse – regardless of whose actions triggered the divorce. More often than not, women are the victims of unpaid spousal support, and yet they have probably sacrificed a great deal until the marriage runs its course. For instance, they may have forfeited financial independence to raise a family and not had a chance of resuming work.

Divorce attorneys are experienced in litigating these matters. We shall work tirelessly to ensure you get the necessary child support and spousal support to keep your family going after the marriage ends.

  1. Filing Taxes

Taxes are yet another complicated area where couples may experience difficulty deliberating when divorce proceedings are underway. Tax liabilities can either be owed to the state in which you reside or the federal government. Every eligible person must fulfill these obligations by filing tax returns annually or risk legal repercussions.

Married people (including domestic partnerships) get a tax rebate if they file joint returns as per the most recent IRS guidelines. Couples who file jointly owe the debt accrued until the legal separation and subsequent divorce is finalized. Everyone must have copies of the tax returns they have submitted during the marital union or at least dating back five years.

When you are negotiating a settlement – like what properties to keep – you should understand the tax implications of said property. The general rule of thumb is that receiving property as part of a divorce settlement counts as a gift, as outlined under the Internal Revenue Code section 1041. Such property, therefore, is not taxable in many scenarios, and this rule defers the tax consequences until such a time when the recipient disposes of the asset.

Nevertheless, when the transferee is a non-resident alien, the law will consider taxable gain on whatever property they receive from the spouse. In this scenario, the spouse making the transfer assumes the tax burden on the gains made, which is computed as the fair market value of the said asset minus the adjusted tax basis in the asset.

Understanding how taxes work in a union and what will happen after the judge grants the dissolution of marriage is vital for all parties involved. From our wealth of experience handling divorce cases, we have encountered husbands and wives with limited financial literacy. We advise clients to get acquainted with the state of finances and be prepared to pay back taxes if they have been skipping on filing returns.

  1. Low Credit Score

The Institute for Divorce Financial Analysts cites money problems among the leading causes of divorce, and a low credit score is something you can expect after the marriage ceases. You may have already noticed this during the union as the debts piled on, and the family's income was not enough to keep things going as they should.

People max out credit cards to accommodate their shopping habits, they sign up for risky business endeavors such as investing in a startup too early, and things become uncontrollable. When the expenditure is higher than income, and the couple routinely falls behind in payments, their credit score takes a hit.

Even making payments later than expected damages your credit rating since 30% of this score is computed based on the credit history. Taking a loan to finance a business you have been operating from the garage only to fail miserably can lead to defaulting, and this will hurt your credit score.

There are other reasons for a bad credit score like filing for bankruptcy, creditors trading your liabilities, going through a foreclosure, etc. The latter is common when a couple buys a home and then fall behind on mortgage payments, perhaps due to losing a job in a dwindling economy. Mismanaging funds due to substance abuse is common as well, and families with good incomes could find themselves struggling to service loans. Whatever the case, your credit score worsens with every wrong financial decision and things spiral from there.

Leaving a marriage is not easy, and some people live for years grappling with this decision until things come to a tipping point and you file a petition. Accepting your marriage has failed and then announcing to family and friends is heartbreaking, especially where kids are involved.

Having a low credit score only exacerbates the issue as you will find it challenging to get credit after the union dissolves and you cannot rely on the other person for financial help. Even when child support is required, the non-custodial spouse may not be well off enough to sustain the children in the new arrangement.

Find a Divorce Attorney Near Me

In a nutshell, the same financial problems that may have led to the separation, and the decision to end the marriage will continue to plague you until the dissolution of marriage is granted. One or both spouses could have been overspending, hiding debt, not being forthright with salaries and other incomes, or they engage in unsavory behavior that jeopardizes your finances.

As we have seen in this article, the majority of money problems don't usually stop upon signing the divorce papers, and families might continue to suffer for years to come. You need to scrutinize the family financial position and gather the necessary proof to help with divorce proceedings. Keep copies of financial records in a safe place – preferably away from home, so your spouse does not destroy them.

San Diego Divorce Attorney excels at getting our clients the best possible outcomes in divorce proceedings, so they are not stuck with unnecessary debt or bullied into accepting low ball offers. Contact our San Diego divorce lawyer today at 858-529-5150, so we can start helping you untangle the family's finances early on in the process to avoid the drawn-out courtroom battles other couples go through.

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