Four Financial Steps to Take Before Divorce
Divorce is an emotional and overwhelming time in a person’s life. If you do not enter the divorce with the necessary financial information, the process may be even more overwhelming than anticipated. By taking certain actions at the start of the divorce process, you can protect yourself from future surprises, and potentially avoid a great deal of stress later on. Here are four financial steps you should consider taking before divorce:
1. Obtain Financial Documents
If you do not keep good financial records or have limited to no access to your financial documents, now would be the time to gather and retain copies of these documents. These documents should include: tax returns, checking, savings, and bank statements; investment statements, retirement account statements, and other documents that address any sources of your or your spouse’s income. Try to gather all of these financial documents for the last three to five years.
Additionally, if you own real estate property (include rental properties), you should gather any documents related to the property. These documents would include: real estate contracts, HUD-1 documents, deeds, mortgage statements, home equity lines of credit (HELOCs), Federal Form 1098 mortgage interest form statements, property tax assessments or tax bills, and all appraisals. If possible, obtain all these documents from the time you bought the property until the present. This could mean going back 10, 20, or even 30 years ago, if you have owned the property that long.
2. Create a List of Assets and Debts
Once you have your financial documents, consider creating an inventory of your assets and debts. This will be extremely useful when it comes time to divide marital property and debts in the divorce.
If you have separate property, you should consider documenting what it is, and why it should be considered your separate property. Under Virginia Code § 20-107.3, as amended, separate property is defined as:
(i) all property, real and personal, acquired by either party before the marriage; (ii) all property acquired during the marriage by bequest, devise, descent, survivorship or gift from a source other than the other party; (iii) all property acquired during the marriage in exchange for or from the proceeds of sale of separate property, provided that such property acquired during the marriage is maintained as separate property; and (iv) property that is a combination of separate property and marital property, known as “hybrid” property.
Under Virginia law, if you receive income from separate property during the marriage, it continues to be classified as separate property if not attributable to the personal effort of either your spouse or you. Additionally, Virginia Code § 20-107.3 specifically provides that “the increase in value of separate property during the marriage is separate property, unless marital property or the personal efforts of either party have contributed to such increases and then only to the extent of the increases in value attributable to such contributions.” Such personal efforts of you or your spouse must be significant and result in substantial appreciation of the separate property if any increase in value attributable thereto is to be considered marital property.
3. Review Your Credit Reports and Credit Card Statements
If you do not regularly monitor your credit reports with the major credit bureaus (Equifax, Experian, and TransUnion), you should consider obtaining a copy of your credit report. This will provide a snapshot of your financial liabilities, and can also reveal any accounts your spouse might have opened in your name without your knowledge or consent.
Under federal law, you are entitled to one free credit report from each major credit bureau per calendar year. If you want to learn what your current credit score is, such as your FICO score, you will be required to pay for that information.
Make sure to review your monthly credit card statements before entering into a divorce. Some credit card companies provide a credit score on monthly statements as a courtesy of being a customer. In addition, your statements can help provide a picture of your monthly expenses—and also perhaps what your spouse might be spending money on.
Once you check your credit reports and confirm what credit card accounts or other outstanding debts you have in your name, you should close all joint credit card accounts that do not have a balance. If an account has a balance and cannot be closed, then you should contact your credit card company to freeze the card to prevent future charges. Taking this step will eliminate the possibility that your spouse will run up a huge credit card bill that you may end up having to pay.
Monitoring your credit report is also helpful if you are going to move out of the marital home and either buy or rent a new home. Mortgage companies and landlords will want to verify that you have good credit and will pay your mortgage or rent on time. If you are not moving out of the marital home right away, it is still wise to keep an eye on your credit report so you can work on maintaining or increasing your credit score. Shoring up your credit score is one great way to prepare yourself for future surprises that may occur in your divorce.
4. Consider Changing Your Estate Planning Documents
If you no longer wish for your spouse to make medical decisions for you (or vice versa), or you do not want your spouse to inherit any of your assets should you unexpectedly die before your divorce has been finalized, then you need to consider executing new estate planning documents. These documents would include a will, power of attorney, and advanced medical directives (or living wills). An estate planning attorney can help you draft new documents (or revise existing ones) to reflect your current wishes as you head into a divorce.
If you are facing a divorce, be sure to consult with an experienced family law attorney to discuss the process, and the potential impact of divorce on your financial situation. Also be sure to review your current estate planning needs with an estate planning attorney. The family law attorneys at Livesay & Myers, P.C. handle divorce cases across Northern Virginia, and our estate planning attorneys are experienced in drafting wills, powers of attorney, and advanced medical directives. Contact us to schedule a consultation today.