As a divorce and family law attorney, I have yet to hear of anyone getting married and opening a savings account for divorce fees should they need such an account down the road. I also do not know of anyone who would call this an oversight. Prenuptial agreement, yes. Divorce sink fund? Not so much. That said, if you have found yourself on the cusp of a divorce, you may very well be struggling to find a way to pay.
Between attorney fees as well as other fees such as temporary spousal support and child support, getting a divorce may not even seem feasible financially. Indeed, many people may decide not to get divorced due to their finances. But over time, co-existing in a marriage that you do not want to be in is not a long-term solution either.
So how can you pay for your divorce if you need one or if it is thrust upon you by your spouse? Below is a list of ways to creatively pay for your divorce, as well as the benefits and possible drawbacks of each payment option.
Though no one likes to feel as though they are paying for something, divorce should not be considered an expense but, instead, an investment in your future. One in which you can create the life you envision. Here are a few ideas about how to get started.
Your spouse
If your spouse makes significantly more money than you, or you have been a stay-at-home parent, you may have the option of having your spouse pay a portion of your legal fees. If they do not take on this obligation willingly, a judge could order them to pay.
Even so, you may still need to fund your divorce initially, even if your ex is required to pay you back later. This is a reality that could present logistical problems in the short term as well.
It is also important to understand that the court rarely orders a spouse to pay all of the fees of the other spouse. The court will consider your need and the other party’s ability to contribute to your fees and make an award accordingly.
Joint funds
The first place you may think to look for divorce funds is your joint savings account. After all, the goal is to save in case of emergencies, which you may think includes a divorce.
First things first. Divorce can cost a small fortune, and you simply may not have enough money in your savings account to fund a divorce. According to this article from Market Watch reporting on data from the Federal Reserve, the average savings account belonging to Americans under 35, excluding retirement funds, is only $11,200. For Americans 55 to 62, it is $57,800. Given how the cost of divorce varies, especially if the divorce is a high-conflict divorce, it can easily put someone into financial ruin if they are not thinking carefully about how to finance it.
Next, it is critical during divorce not to change your spending habits from the time when you were married. Going “rogue” and making a large withdrawal without your spouse’s knowledge or permission from your joint savings account to finance your portion of the divorce could present issues during the division of assets. If you make large withdrawals or expenditures from joint accounts, even to finance a divorce you deem necessary, you may be obligated to return those funds. Or they could be counted as part of your assets in the division.
Unless you and your spouse agree to finance each of your portions of the divorce using joint funds, you should consult with a divorce attorney first. If you choose to do this before hiring attorneys, a general rule of thumb is that you should not take more than half of the funds in an account.
Crowdfunding
An unconventional option for funding your divorce could be crowdfunding. The most significant drawback to this technique would be how you portray yourself, your ex, your children, and your divorce overall online, which could reflect negatively on you in court. So, at a minimum, be careful not to talk badly about your ex online.
Liquidation of assets
When considering assets for distribution, there is a difference between separate property and community property (community property). Separate property refers to property that you acquired before marriage and belongs solely to you. Community property is property acquired during your marriage or purchased using marital funds, which generally means it belongs to both you and your spouse.
In a divorce in Washington, however, all property, both separate and community, is before the court for division. While it is common for judges to award separate property to the spouse to which it is attached and then divide the community assets between the spouses, this is not always the case. All property, separate and community, is divided by the court “equitably,” not “equally.” This means in some situations, the court may award the separate property of one spouse to the other in order to create an overall equitable division.
Like anything else in divorce, the categorization of separate property and community property can also become nuanced; sometimes, the delineation between separate property and community property is clear, and sometimes it is not. Therefore, if you choose to liquidate what you believe is your separate property to finance your divorce, understand that it could become the subject of dispute during the divorce process.
A judge could also regard a move like this right before divorce as brazen or self-serving. Such a perception could potentially complicate the divorce proceeding for you, making it wise to find another way to fund your divorce. Contact a Seattle divorce attorney for guidance.
Credit cards
If you have “good” or “excellent” credit, you may be considering paying for your divorce using a credit card you take out separately. Doing so would likely necessitate you creating a separate bank account to pay for card charges.
You may also be considering spreading your spending across multiple cards so that none exceed a 30% credit utilization on any one card. If you do not have good credit, however, you would need to work toward improving your credit first before using this method to finance your divorce.
In any event, you would need to disclose your usage of a credit card or multiple credit cards on your financial statement during the divorce process. Another drawback is that credit cards tend to come with high-interest rates. Indeed, the accumulation of debt during divorce could impact your finances and, hence, the quality of your post-divorce life, which you also need to consider.
Personal loans
Personal loans (unsecured loans) do not generally require collateral or much in the way of security. They also usually do not require as much documentation and, in many cases, come with lower interest rates than a credit card.
To be eligible for a personal loan from a commercial lender, lenders will evaluate your credit score and history, income, and debt-to-income ratio. This will include any debt you and your spouse accumulated during the marriage, even if the debt was only in your spouse’s name, as debt, like assets, is divisible in divorce.
Some people are able to obtain a personal loan from a parent, family member, or close friend. Unless such people are particularly prosperous, it is unlikely any of them would be able or willing to finance your entire case. A small loan may be possible, but the caveat is that borrowing money from friends and family can put relationships at risk. Also, they may incorrectly believe they should have a voice in the management or decisions on your case. So you should carefully consider availing yourself of loans from these sources.
It is helpful to have an idea of how much your divorce will end up costing you when taking out your loan, but this is not always possible. As with any loan, it is important to determine if you will have the means post-divorce to pay the loan back.
If you are counting on a judge to direct your spouse to pay your divorce fees, including a personal loan, it is likewise critical to understand that this is not a given. As discussed earlier, you may still be required to pay back the loan.
Retirement accounts
Another option is to borrow from your retirement accounts, such as your 401(k) if your 401(k) plan permits. Many, but not all, retirement plans permit loans, so be sure to check with your employer first. Additionally, your plan may require your spouse to consent to your loan as well, and the loan would likely also be considered during your division of assets.
One advantage of 401(k) loans is that they generally have a lower interest rate than personal loans. According to the IRS, “The maximum amount that the plan can permit as a loan is (1) the greater of $10,000 or 50% of your vested account balance, or (2) $50,000, whichever is less.”
For a 401(k) loan, you would need to pay the loan, plus interest, within five years of when you took out your loan. A caveat: you have to keep your job at your current employer for the life of the loan, or you will have until the next tax date (April 15) to repay it in full. If you do not, you will have to pay the tax consequences. Another caveat: by borrowing from your 401(k), you could potentially miss out on any market gains you would have otherwise accrued from your investment while you are borrowing the funds.
If the loan on your 401(k) is not paid back according to its repayment terms, then it is treated as a distribution from your plan, which makes the money taxable. Otherwise, 401(k) loans are non-taxable distributions. As you can probably see, each of these scenarios could potentially impact your divorce and how assets and debts are distributed.
With some retirement plans, the written permission of your spouse is required to borrow from your 401(k). This is because even though the retirement accounts may be in your name alone, they are funded by earnings during the marriage and thus community property. Before taking a loan against retirement accounts to fund your divorce, either in anticipation of a divorce or during one, it is in your best interests to speak with your attorney about whether doing so is advised and the possible implications.
Investment accounts (securities)
Some brokerage houses allow their clients to take loans against their investment accounts. Doing so would not necessarily require the sale of assets.
However, these loans do come with a high degree of risk. For example, the value of such investment accounts turns on market conditions, making them more volatile and, accordingly, the loans against them. Should the stock market drop, for instance, the loan could become higher than the value of the asset securing it.
Also, the sale of such assets to finance a divorce, or taking a loan against them, will need to be addressed in the final division of assets and debts. A Seattle divorce lawyer can help.
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) allows you to borrow against the equity in your home, typically at a variable interest rate over a set period of time. The primary consideration of this loan would be how it would impact your marital home.
Taking out a HELOC without your spouse’s knowledge or consent would be frowned upon by a judge during a divorce. Also, in some counties in Washington, borrowing money from a line of credit may be prohibited under the orders related to your case.
Whole life insurance policies
Whole life insurance policies, unlike term insurance, can have a cash value. Depending on how long you have the policy, its cash value may be substantial, making it a monetary source you can potentially access for purposes of financing your divorce.
Loans against a whole life policy are tax-free. The interest rate also tends to be lower than other types of loans. Accordingly, the loan repayment installments are lower, too, and may even have interest-only repayment options. If you die before repayment of the loan, your beneficiaries would receive their designated share less the amount of the outstanding loan.
Again, borrowing against a whole life policy raises the issue of how the loan will be accounted for in the final division of assets and debts.
Companies specializing in divorce loans.
There are companies that specifically finance divorce. Depending on the services a particular company offers, a loan of this nature could cover the cost of the divorce and or reasonable living expenses during the divorce process.
Discuss how to pay for your divorce with a Seattle divorce attorney.
Divorce, including how to pay for it, can be daunting, especially if you have never gone through the process before and are unsure which method of payment will be your best option. An experienced Seattle divorce lawyer can help you decide which method could work best for you.
Like most ventures, especially ones that have the potential to improve your circumstances, an investment, especially of time and money, is necessary. The good news is with a law firm whose team looks at divorce holistically, meaning its members believe in your personal development and growth throughout the process and beyond, any investment you make stands to reap the returns you envision. Elise Buie Family Law is that firm.
Our team of family law attorneys has decades of cumulative experience in divorce and prides itself on minimizing conflict during the divorce process, so your divorce can proceed quicker and more smoothly. We also pride ourselves on thinking outside the box and can direct you to resources that can help you reach your goal of financing your divorce so that you feel most comfortable. If you are considering a divorce or are at any stage of the divorce process and would like to discuss how to pay for it, call our office to schedule a consult today.
