Financial Literacy for Everyone

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A divorce can be one of the hardest experiences a family faces. The emotional impact of divorce is difficult, and stressful financial decisions can cause more complications.

buying a home

When navigating a divorce, you will need to make decisions about lawyers, home ownership, child custody, child support and splitting assets.

Lawyers and Mediators
It is common for people seeking a divorce to work with lawyers to help them with the legal aspects. Although it can be costly to work with a lawyer, attorneys offer expertise on how to split assets fairly and legally.

Do You Need a Lawyer?
If you and your spouse are able to agree, you may be able to handle your divorce yourselves with the help of a neutral third-party mediator. Even if you and your spouse are divorcing on cordial terms, it can be hard to decide what's fair for both of you. A lawyer can be an advocate to help you make tough decisions.

Finding a Lawyer
Finding the right lawyer is important. You want someone you can trust to guide you through a difficult process. Check his or her credentials and qualifications carefully so you can find the best person to represent your interests in your divorce.

Reducing Legal Fees
If you can, negotiate a fixed fee for your attorney. Otherwise, you can reduce fees by remaining actively involved in your case and following your lawyer's instructions carefully. Before a lawyer represents you, you will need to sign a written fee agreement. This is a legal document explaining the fees that your lawyer will charge.

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Divorce and Home Ownership
A house is often seen as more than an asset. It's where you live. You may have put a lot of hard work into making the house feel like home, and it can be a difficult decision to give that up during a divorce.

Will You Keep or Sell the House?
You may have bought the house with two incomes, and keeping up with payments on one income may be tough or even impossible. Remember to calculate not just the monthly mortgage, but also the insurance, repairs, maintenance, property taxes, utilities and other expenses for which the owner will be responsible.

  • Keeping it – To keep the house, you may be required to buy out your spouse's equity in the house, which is measured by the value of the house minus any mortgages owed on it. You might be able to "trade" assets. In other words, you would give up your half of some other assets you own jointly to pay for your spouse's half of the house. You may also be able to refinance the mortgage for more than you currently owe and pay your spouse for your spouse's half of the house from the proceeds of the new mortgage. If your spouse will be keeping the house, make sure you obtain an appraisal if the value of the home is in question.
  • Selling it – In general, selling a house will likely put you in a better financial position, but not always, depending on market conditions. Consider how much you can sell it for, then subtract selling costs and the amount that is still owed on the mortgage. If you're selling and splitting the proceeds, you'll need to halve that amount. What you're left with must provide you with a solid financial base from which to find a new place to live and start your new life.

Taxes on the House
If you're awarded the house in your settlement, whether you choose to remain there or sell you'll have serious tax implications to consider. Before you decide to keep the house, be sure you consider capital gains taxes. Individuals are allowed up to $250,000 in tax-free capital gains when they sell their home. Couples are allowed $500,000. To qualify, you must have lived in the home for at least two of the five years prior to the sale. There is no age requirement.

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Splitting Assets
You need to know what you and your spouse are worth together and what you're worth on your own. It sounds like a lot to assess and calculate, but it comes down to a simple equation:

Net Worth = Assets - Liabilities

There are three categories of assets:

  • Joint Assets – Assets you have built together, including savings accounts, money market accounts, mutual funds and a co-owned business.
  • Your Assets – Accounts that you opened before you were married and have been the only contributor to. Things that you owned before you married are also included in your assets.
  • Spouse's Assets – Anything your spouse opened or owned before the marriage, including an individual IRA or assets inherited from family members.

You're both entitled to a portion of each other's retirement benefits that were earned during marriage. In order to get part of your spouse's pension or 401(k), you'll need a lawyer to draw up a qualified domestic relations order, or QDRO (pronounced "quadro"). There are several options, including a one-time payment, monthly payments at retirement, or a lump-sum payment that you transfer directly into your own IRA, where your money will continue to grow tax-free until you retire. IRAs can be divided without a QDRO, as long as the division is clearly specified in your divorce agreement.

Consider future value, since assets such as a pension could be valuable down the road.

You may need to appraise real estate, artwork and collectibles to determine their value. If you co-own a business, you will need to assess its value to determine the amount needed to buy out the other spouse's share of the business.

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