Editor's Note: This is the first of three-part series that will cover five key financial steps to take before entering divorce negotiations. Part One covers the first of the five steps: checking your credit report.
Getting a divorce can be traumatic. It's an ordeal that can take a financial and emotional toll on everyone involved. Even when the intent is to have a "friendly," nonconfrontational divorce, both parties must make sure they're doing everything possible to protect their financial futures. But quite often, people in the midst of a divorce don't know which financial decisions will serve their long-term interests best.
The website divorcerate.org, which monitors statistics on divorce from a number of organizations and foundations, estimates anywhere from 40% to 50% of all marriages in the U.S. end in divorce. Second and third marriages have an even worse track record -- with more than 60% of those unions ending in separation.
Unraveling a marriage's once-intertwined lives and finances can become a real challenge -- especially if both parties plan to meet their current financial obligations and future goals. To help with that process, a new type of financial adviser is gaining popularity: the certified divorce financial analyst, who specializes in helping clients make educated decisions during times of transition such as divorce, retirement or the death of a spouse.
Most CDFAs are already certified financial planners or financial advisers -- who then obtain additional certification to specialize in divorce cases. Hiring a CDFA could make a major difference in the type of divorce settlement you reach, but experts suggest that a CDFA is most appropriate for couples with a net worth of at least $250,000.
Fees for CDFA services vary. The vast majority of CDFAs charge an hourly rate, but some charge a fixed fee to handle a divorce, so you'll have to shop around. There are also CDFAs that will handle your situation for free -- but the catch is they'll want you to purchase financial products from them, such as insurance, or they'll want to become your financial adviser. Be sure to select a CDFA based on his or her ability to safeguard your interests -- not based on the cost.
Carole Peck, a licensed CDFA in Florida and Illinois, says interest in her specialty is growing. That's because it's difficult for many people to navigate through financial issues while they struggle with the emotional aspects of their lives during and after a divorce. Many breakups are also quite complex. Rarely do they involve just splitting assets down the middle, perhaps also including legal, tax and retirement issues that require more than just a divorce lawyer.
"An attorney's objective is to give legal advice, not tax advice or financial advice," says Noah Rosenfarb, a licensed CDFA and managing director of Freedom Divorce Advisors in New Jersey. "Often, an attorney will say 'this is the best deal that I can get you,' but that may not be the best deal for living your life after the divorce."
Rosenfarb, whose practice only handles high net worth clients, points out that there are four different ways to go about getting a divorce, and not all of them involve a lawyer. But the approach taken could have significant financial ramifications:
Litigation: Going through the adversarial court system. This process can be long, drawn-out, public and painful.
Mediation: Both parties actively work together for a solution that works for them. This doesn't guarantee a fair solution, just one that both parties agree on. It can also put the party with less information at a disadvantage.
Collaboration: Both parties agree to have their attorneys and a team of people, including a financial professional, work together to find a solution without going to court.
Arbitration: Both parties agree to allow their case to be decided by someone who acts like a judge -- mainly because they want to keep their financial issues out of a courtroom.
"Figure out which path you want to go down, and get educated about the pros and cons," says Rosenfarb.
The Five-Point Checklist
Once divorcing spouses decide on the approach they plan to take, Peck says they should review five financial areas before entering into negotiations. She says going through this checklist before divorce proceedings can help both men and women understand their advantages. It can also help them determine any financial needs their divorce settlement must meet. This information, she says, could be critical in helping you negotiate a settlement you can more easily live with. "At least, get a clear picture before you get into negotiations," Peck advises.
1. Check Your Credit Report: This will alert you to any outstanding credit, liabilities or other debts that may be in your name -- but that you may not have been aware of. Peck says you want to verify the accuracy of all accounts and determine if any lines of credit have been opened in your name without your approval. Your spouse may have created debts that you are legally liable for, even though you weren't responsible for paying those debts during the marriage.
"In a worse-case scenario, I've known two people who have actually had second families concurrent with the first family. So, there were lots of credit card accounts that the first spouse didn't even know about," Peck says.
Checking your credit report before the divorce will also let you know if your spouse has affected your personal credit profile. Joint accounts may show up on your credit report and may damage your credit. Responsibility for joint accounts must be established and resolved as part of the divorce settlement.
Peck says some couples may need to maintain joint accounts for some time after the divorce, because one spouse may be unable to maintain credit cards or bank accounts alone and to eliminate them would cause an unacceptable hardship -- especially if minor children are involved.
Rosenfarb says it's always a good idea for all individuals to establish at least one personal credit card -- and if you know a divorce is possible (or imminent), establish an account as soon as possible. He also recommends married couples with joint credit card accounts make sure to reduce their credit limits to small, manageable amounts. If you already have high limits on your joint credit cards, call the card company and lower them now. "That way, you don't have the opportunity for one spouse to go out on a shopping spree," he says.
Coming next: Part Two will cover the second and third steps in preparing your finances for divorce -- listing all your assets and having them appraised.