Chapter 1 Legal Vs. Financial Realities of Divorce

• Library: Divorce & Money (Nolo) (2020 Ed.)

CHAPTER 1: Legal vs. Financial Realities of Divorce

Lessons in Legal Reality

Most Divorces Are Settled Out of Court

Divorce Law Is Local

Don't Expect the Legal System to Take Care of You

It's Easier to Write Laws Than to Enforce Them

Your Best Strategy: Think Financially—Act Legally

Legal vs. Financial Stages of Divorce

Sooner or later during your divorce, you will discover one insight that is central to this book and to the successful outcome of your settlement:

Legal reality and financial reality are fundamentally different.

A seemingly simple idea—but you'd be surprised how long it takes to sink in. To help you understand why this concept is so important, take a few moments to consider the following real-life divorce stories. In each, read the Legal Reality first. Then, see the true outcome in the Financial Reality side.

Legal Reality

Financial Reality

Jonathan and Penny were married for five years before they divorced. During that time, Penny frequently ran their credit cards to the limit buying clothing and had trouble balancing their checkbook. When they reached the final settlement hearing, Jonathan was greatly relieved when the court made Penny solely responsible for paying the $10,000 in credit card debts she had accumulated during their marriage. The settlement was included in the final divorce judgment, which made Jonathan feel safe.

After the divorce, Penny didn't pay off the credit cards, and creditors began hounding Jonathan for the money. Jonathan ended up footing the bills, because a divorce settlement assigning debts—even one included in a divorce judgment—cannot change a couple's original joint obligation to their creditors. Had Jonathan raised the issue before their settlement was finalized, he could have demanded more property in exchange for paying Penny's debts or insisted that they sell some jointly held property to pay off their creditors.

Moral of the story: Getting something "in writing" from the court doesn't always mean you'll get it for real.

Legal Reality

Financial Reality

During their 15-year marriage, Sharon and Bill were committed to building up a good portfolio of stocks and mutual funds for their retirement. Because Sharon avidly followed the market, she wanted to keep a batch of stocks she had recently purchased and asked Bill to take stocks of equal value, which they had purchased early in their marriage. After negotiating over a few other assets, Bill and Sharon reached an agreement in which each of them would receive the exact same dollar amount in cash or assets at the end of the divorce. The court accepted the terms of their settlement, and the books on their marriage were quickly closed.

Sharon paid attention to basic financial facts that Bill ignored: costs and taxes that decrease the value of an asset. Sharon wisely picked the stocks most recently purchased. Because these stocks had not increased substantially in value, the taxable capital gains were low. Bill, however, blithely accepted the older stocks, which had gone up a lot in value since the time of purchase. Even at a capital gains rate of 20%, he owed substantial taxes when he sold the stocks. Had he taken the time to calculate his potential tax burden before agreeing to the settlement, he could have suggested splitting the stocks so that each spouse took half of the older stocks and half of the newer stocks.

Moral of the story: A 50-50 settlement isn't always equal.

Lessons in Legal Reality

The legal and financial perspectives on divorce are two distinct views of the same event. Ending your marriage with no assets or huge debts is the hard way to learn about the difference between these two realities. But if you are proactive from the get-go, your lessons don't have to be so costly.

If you intended to master Chinese cooking, you wouldn't begin by picking up Julia Child's Mastering the Art of French Cooking, even though it covers the same general topic of cooking. Similarly, you must take the time to consider the crucial differences between the legal and financial perspectives on divorce.

These four basic guidelines help define the legal perspective of divorce:

• Most divorces are settled out of court.
• Generally, divorce law is local.
• Don't expect the legal system (or a lawyer) to take care of you.
• It's easier to write laws than to enforce them.

Most Divorces Are Settled Out of Court

You may imagine that your divorce will be capped by a courtroom trial in which your "good guy" lawyers win the day and settle everything in an hour. Perhaps you're eagerly anticipating that your day in court will be an opportunity to explain to a wise, kindly judge exactly how your spouse wronged you.

Don't count on it. Legal TV scripts do not reflect reality.

An estimated 90% of divorce cases are settled without a court trial. Most of your settling will be done through meetings between you and your spouse or between your lawyers, often on the courthouse steps. As the trial date nears, you will quite likely be rushed into conferences in the courtroom hall or coffee shop. In these frantic meetings, your spouse and/or the attorneys may confront you...