The financial implications of divorce

Are you going through or considering a divorce? This difficult time is usually clouded by a lot of emotional strain and grief. This can also be a time of a lot of financial stress. But there is light at the end of the tunnel and knowing what to expect is critical in setting you on the right path to start your new life.

Here are three important things to consider before you initiate the process.

1. 1. Know your legal rights.

Before you initiate a separation it’s important to first have a general idea of what your post-separation life is going to look like.  What kind of financial settlement might you receive? Are you going to be entitled to keep the house?  Receive support?  Protect your parenting rights?  Do you have a marriage contract (prenup) and, if so, what impact might that contract have on your ultimate entitlement? There are many, often interrelated issues to work through, and they can feel overwhelming.  A preliminary consultation with a lawyer can be extremely helpful in giving you a sense of what the “big picture” might look like following a separation, and in preparing you for some of the challenges you may encounter along the way. 

Some lawyers give free initial consultations, and others charge a fee. Some people choose to speak to more than one lawyer to get a sense of the different strategies that could be pursued. However, it’s important to understand that lawyers’ opinions are only as good as the information they are given by the client.  In order to truly understand your legal rights, make sure that before you broach the topic of separation with a lawyer, you are armed with as much information as possible. 

So, before you pick up the phone, it pays to generally familiarize yourself with Ontario Family Law.

2. 2. Get a clear financial picture.

This is where many people get bogged down or overwhelmed – particularly if they aren’t good with numbers or financial concepts, if their spouse is the one who has handled the finances during their marriage, and/or if their spouse is secretive about their finances.  It can also take time for the full financial picture to come into focus - for example, if certain asset values are unclear or if someone’s income is challenging to figure out – in which case a professional valuation, appraisal, or income analysis may be necessary. 

Not to worry – you are not expected to have every financial detail at your fingertips before you get started. However, if you can provide your lawyer with a summary of the following information, this will not only save you time and money during the initial interview, but more importantly, it will give your lawyer the ability to provide a high-level sense of where you may stand – to be fine-tuned as more information comes to light:

• Your income for the last three years;
• Your spouse’s income for the last three years, if this is available to you;
• A list of your children’s current “special/ extraordinary expenses” as defined by section 7 of the Ontario Child Support Guidelines,
• The values of any assets and liabilities you and your spouse owned or owed on the date of separation (both jointly and separately). Ideally, you should be gathering copies of account statements for eventual use, if these are available to you;
• The values of any assets and liabilities either of you brought into the marriage;
• The values of any gifts or inheritances either of you received from third parties (such as parents) during the marriage.

Here is some additional information on preparing your financial documents.

It’s important to note that the laws on property division in Ontario differ depending on whether you and your spouse are in a common-law relationship, or are legally married.  If you are in a common-law relationship, make sure to share this information with your lawyer at the outset of your consultation.

3. 3. Consider your current and future budgets

Unless you’re independently wealthy, it’s likely that both you and your spouse will need to cut back on your spending following the separation.  Not only must your assets be divided according to law, but the available family income must also be split between two households, meaning that there will be far less to go around in each household.  While this may seem obvious in theory, the reality for most people is that the adjustment to a post-separation budget is a huge shock to the system.  Here are some specific things to think about:

• The big picture. Prepare yourself by creating a realistic budget. While your lawyers, mediator, and neutral divorce financial professional can help you with this, you should give some preliminary thought to whether it may be affordable for one of you to buy out the other person’s interest in the matrimonial home, or whether it will likely need to be sold (a buyout usually entails qualifying to take on a significant mortgage on your own, and/or having wealthy parents with the means and the desire to help fund a buyout and/or guarantee a mortgage). 

• Your future home. If you think your home will need to be sold, you should give some preliminary thought to your budget for a new home, and start researching housing options.  Will you rent? Buy?  What areas are affordable? What’s the monthly budget for all housing expenses?  Don’t forget that if you and your spouse will be sharing parenting responsibilities, you will need to ensure that your new homes are relatively close to each other, so that the parenting plan runs as smoothly as possible.  Sometimes, this entails both spouses renting, even if they owned prior to the separation; other times, both spouses agree to relocate to a less expensive neighbourhood following the sale of the house.

• Covering transitional costs. In addition to the cost of housing, it is ideal if you can set a fund aside for legal fees, moving costs, and first and last months’ rent, if you plan to rent. If funds are tight, lines of credit or loans from parents or extended family members may help here. 

• Getting professional financial advice. Finally, give some thought to where you can cut back in your budget post-separation, and how you might ultimately invest your settlement funds in order to maximize your returns, avoid incurring debt, and save for retirement. Working with a Certified Divorce Financial Analyst and/or an Investment Advisor is one of the best decisions you can make at this time, particularly if you haven’t had much experience managing money before.

Divorce can be overwhelming, particularly when you have no idea where to begin. Click here to register for our free webinar, Divorce 101: A Roadmap to Resolution and to receive a copy of our free eBook: 7 crucial steps to take before uttering the words “I want a divorce.”

Mark Shimkovitz is a financial advisor with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James. This article is for information only. Raymond James Ltd. member of Canadian Investor Protection Fund.