The holidays are over and you have reached the decision to separate and get a divorce. Although you cannot actually file for a divorce until after you have been separated for over a year, couples might be more likely to separate in January than in other months.
If the day has finally come that you and your spouse need to call it quits, you might be wondering what to do next.
- Should I move out of the house? (covered in a previously blog post you can read here)
- How do I handle my finances while we are separated?
- How do I manage custody of the children, including being able to visit them if I leave?
These kinds of questions are common for people who decide to separate or divorce. Since ending your marriage is complicated, it is important that you address all the questions you have right from the start. By taking a few steps to prepare for your separation, you may not only find the answers to these questions, but you might realize there are other issues you never even dreamed of.
Today, we are going to focus on financial issues:
Examine your Finances
In a separation or divorce, the question of finances is often one of the most important. It is vital that you take steps to ensure that you walk away with a settlement that is fair and provides for your needs. In order to do this, you must do some work to ensure that you know the complete financial picture of your family.
Step 1: Know what you and your spouse own and owe.
Make a full inventory of all the assets and debts you acquired before your marriage, as well as what you and your spouse acquired during your marriage.
For example, it makes sense to gather the following:
- The mortgage documents on the house,
- Copies of your most recent tax returns,
- A credit report,
- Documents such as bank statements, credit card bills,
- Statements from your private investment accounts,
- Copy of company retirement accounts, or 401ks, and
- All other documents that provide financial information.
Do Not Attempt to hide any assets!
It is completely normal to want to protect your financial assets during a divorce. However, you need to know the difference between creating a proactive strategy for your divorce and potentially violating state law when it comes to dividing your assets. Intentionally hiding assets from your spouse and the courts could result in a far less favorable outcome to the asset division process.
North Carolina courts seek equitable distribution arrangements
Dividing up you and your spouse’s assets and debts is called “equitable distribution” in North Carolina. And unless you and your spouse have a valid prenuptial agreement on record, you either have to agree on terms for the division of your property or let a judge make those decisions for you. Judges do their best to ensure that they divide your assets and debts in a manner that is equitable, fair and just, but also accounts for your particular circumstances. If you’re headed to court for a judge to decide, you will have to provide an inventory of all of your marital assets and debts. These include the items we listed above – both assets and debts.
Simply leaving significant assets, such as a hidden bank account, off of this inventory could influence the outcome of the court’s decision. If your spouse, his or her attorney, or the Court discovers that you intentionally withheld financial information in your divorce, you could face steep penalties when the courts do finalize the division of property.
Avoid all of the common forms of hiding assets
There are many ways for spouses to hide assets, but the courts, divorce lawyers and forensic accountants know about most of them. It is common, for example, for one spouse to divert household income, which is rightly marital assets, into a separate account that the other spouse knows nothing about. Other people may make routine cash withdrawals from shared accounts, into a secret account, which creates a secret stockpile of liquid capital.
Another common way to hide assets is in purchases that you know won’t interest your spouse. If you have a hobby, like collecting fine art or rebuilding class cars, the items you purchase to support that pastime could very well represent substantial amounts of marital assets. Even if you know your spouse has no interest in the actual objects, if you bought them with marital assets (income during your marriage), you should plan to report it.
Step 2: Make Sure you have a Copy of any Pre-nuptial Agreement, (if you both signed one).
A pre-nuptial agreement can designate what happens to the property each of you brings into the marriage. These are usually referred to as “Simple” prenups – where individuals want to treat what they own prior to marriage as separate property and then anything that happens during the marriage is marital property or separate property. This is a simple agreement because the agreement clearly delineates marital and separate property. Therefore, if you and your spouse created and signed a pre-nup, make sure you have a copy and you provide it to your attorney.
Step 3: Create Your Own Financial Identity:
Preparing one’s own finances can help a person prepare for the separation or divorce process. For most couples’ finances have been intertwined, including joint accounts. Thus, it is important that you start planning for financial independence.
- Perform a credit check: During a marriage, both partners’ credit can also become distinctly intertwined. After separation or divorce, however, having a good individual credit rating will be critical for one’s ability to buy a home, obtain a loan or even get the best rates for auto insurance. By requesting a copy of their credit report, you can check for errors and have them corrected before needing to rely on their individual credit.
- Open your own bank accounts and credit cards: This can help prepare for the separation and post-divorce era. And you should open an account at a different bank in your name only.
The impact of separation or divorce on taxes
North Carolina couples who are ending their marriage should give careful consideration to the effect it has on taxes. Income tax considerations are not usually at the forefront of divorce legal issues, but they can be important.
- The change in filing status: Based upon when you separate, you may have an option to file as married filing separate, or filing jointly. You should consult with a tax professional to be determine what is best for you.
- Additional tax considerations to keep in mind when there are children: The divorced couple will have to determine who will be allowed to claim the children as dependents and the accompanying tax exemptions. Custodial parents, or those parents with whom the child resides the majority of the year, are generally given the right to claim the dependent children. However, non-custodial parents may be able to claim the dependent child exemptions if the custodial parent agrees to it. Parents who claim the dependent exemption may also be eligible to claim the child credit.
Build your team
Your divorce team is going to be your strongest asset during the process. From you attorney to your accountant, financial advisor and even your therapist, these people can offer you sound advice. By building a solid team, you can have access to the guidance you need to make rational and informed decisions so that you have the most successful separation or divorce possible.
If you are considering a separation or divorce, it is important to start planning as soon as possible. By making a few preparations, you may be able to make your separation or divorce a smoother process and be ready to start over when it comes time to finalize the divorce.
Going into a separation or divorce financially prepared can help a person plan for what to ask for during property division. It might be possible to negotiate this division with the other spouse, and a person can discuss strategies with the attorney ahead of time. Many people suffer financially after a separation or divorce, so it is important for people to protect themselves at this time.
Missed the First Post: Read here if you are thinking of moving out of the family home
Next post: Our next post will focus on Children, Custody and Visitation.
Want to talk to an attorney? Contact us today at 707-333-9900 and schedule a consultation.