A Real Life Example-

Tom and Lisa, both age 40 went through a divorce and used an attorney to finalize their divorce decree.  Their financial situation was fairly simple, but their settlement resulted in some long-term issues that we see far too often.

They agreed upon the following division of assets, which resulted in a 50/50 split between them:

• Lisa would continue living in the home, keep the equity on the house, and take over the mortgage payments.

• Tom would keep most of his 401K account, with a small portion going to Lisa.

• Their savings account would be split equally between them.

• Tom would take over the joint credit card debt.

Unfortunately, after the divorce was finalized, Tom failed to make payments on the joint credit card debt.  The late charges and interest quickly accrued, which negatively impacted both of their credit scores.

Lisa, meanwhile, had no idea that her credit score was going down.  She had not worried about the credit cards since Tom was listed on the divorce decree to make payments and had been receiving all the credit card statements.

A little while later, Lisa started having financial struggles and had a hard time keeping up with her mortgage payments.  She quickly went through her savings and the portion of Tom’s retirement plan she had been given.  When she went to try to refinance her home to a lower rate and access some of the equity in the home, she found out that her credit had suffered due to the joint credit cards, and she was not able to refinance the home.

Even though Lisa was able to find a way to make the mortgage payments and kept the house, her net worth suffered in the long-term due to the imbalance of their original equity division in the divorce.  She had no retirement savings at the age of 65 and the equity in her house could not be accessed to provide retirement income.  Tom, on the other hand, had held onto his 401K which continued to grow and provide sufficient savings for retirement at age 65.

All too often, settlements that appear even and fair at the time of divorce have long-term effects where the division becomes highly unequal.

HERE ARE SOME RECOMMENDATIONS THAT COULD HAVE CHANGED THEIR SCENARIO:

•  Sell the home and split the proceeds evenly.  Lisa would be able to purchase a smaller home with a mortgage she can afford.  Additionally, Tom would not have to worry about his name being on a joint mortgage that could affect his credit score if Lisa were unable to make the mortgage payments.

• Open individual credit cards, then pay off the joint credit card debt.  Divorce courts do not have the power to wipe out your obligations to lenders, such as credit cards, auto loans, or mortgage companies.  If your name is still attached to the debt, you are still liable for the balance, even if your spouse has been the one ordered to pay the debt.

• Split the 401K balance equally.  If Lisa rolls the funds into her own retirement account, they will both have tax-deferred savings and the potential for higher earnings growth over the long-term.  This will help in creating a more balanced long-term solution for them both.

This division still results in a 50/50 split between Tom and Lisa:

As a result, Lisa is better able to afford her mortgage payments, Tom does not have to worry about making payments on the joint credit card debt, and they have a much more equitable net worth at age 65 when they both decide to retire.

Don’t be comfortable with equal numbers until you’ve seen a layout of both the short- and long-term ramifications of your settlement options.

Contact us at Begin Again Financials to schedule a consultation and discuss your personal situation.

**This is a simplified case study.  Other considerations could include child support and alimony payments, potential tax liability on selling the home, projected income and expenses after divorce, accessibility to health insurance if no longer on a spouse’s plan, social security estimates for retirement, hidden assets by either party, tax strategies after the divorce, and more.

**The case study results are for illustrative purposes only and should not be deemed a representation of past or future results.  The example does not represent any specific product, nor does it reflect other expenses that may be required. No representation is made as to the accurateness of the analysis. The example above is hypothetical in nature and is not intended to be a recommendation of any strategy.