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Dividing Finances in a Divorce

In Texas family law, we could say “fair” is what happens at the state fairgrounds in October each year. Dividing finances in a divorce is seldom “fair.” What each person thinks of as “fair” is completely subjective.  People often come into the divorce process thinking that what they want is “fair” – but most assuredly, the other person will have a completely different opinion, especially when it comes to money, typically a hot-button topic.

We have some general rules that we share with our clients when it comes to dividing finances in a divorce:

  1. First, hire a good lawyer who knows the law and the judges in your jurisdiction. We have spent years practicing in front of judges, and we have a pretty good idea about how much discretion a judge is likely to consider on certain issues – such as adultery, frivolous spending, disparity in income. Knowing the ballpark in which you are playing is helpful when it comes to determining your likely division if the judge were to make that decision.
  2. Your best alternative to what the judge can and is likely to do in your case may be a negotiated agreement. You and your partner can craft an agreement that is more creative and better tailored to your family and situation. Making an effort at creating a solution can lead to a much more palatable result for both parties.
  3. Replace the word “fair” with “acceptable.”  Consider what you can and cannot live with, and make a game plan accordingly.  Most of the time, both parties will leave the divorce process at least a little disappointed in the outcome.  You are not going to get everything you want, or think is fair. Neither will your partner.
  4. When considering dividing finances, start with the end in mind.  Where do you want to be at the end of this divorce process?  This can be difficult for many who didn’t have time to plan for a divorce, or don’t want a divorce.  However, this is the creative part of the divorce process, where you get to focus on the life you want to create when the divorce is over.  So set objective markers to work toward (e.g., a certain amount of money in retirement, only a certain amount of debt, etc.).

We also have some practical advice when it comes to preparations:

  1. Make sure you pull your credit report, and know all the debt and credit cards accounts on which your name appears.  The divorce decree will not be able to change the underlying credit contract, unless your spouse put your name on accounts without your knowledge (also known as fraud – it happens).  We need to know this information before we start dividing assets.
  2. If you have the choice between a monthly alimony installment payment over time, and cash today – take the cash today.  Relying on an ex to make monthly payments can be risky, even when these are court ordered obligations.  Trying to enforce the obligations is expensive and time consuming, and you may have difficulty collecting on the obligations even if you “win” in a hearing..
  3. If you are contemplating a divorce, do not take out loans in both parties names, or refinance the mortgage in both parties names. Do not take on any additional credit cards or financial accounts in both names. Save copies of all financial documents you can get access to as well.
  4. Regarding taxes, filing a joint tax return subjects you to joint and several liability.  Make sure you get a tax advisor working with you who can also advise you regarding the possible taxation of assets such as brokerage accounts, rental properties, etc. Make sure to save copies of all tax documents.
  5. Options to divide retirement accounts will depend on the kind of retirement accounts you have.  Generally, employment sponsored retirement accounts such as 401ks and defined benefit plans (pensions) can be easily divided with a proper order.  Funds can be  easily divided in a divorce, and generally will not result in a taxable distribution if the funds are rolled over from one spouse’s IRA to the others. Again, save all records.